<PAGE> 1
ADJUSTABLE U.S. GOVERNMENT FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 15, 1995
This Statement of Additional Information ("SAI") provides information
about Adjustable U.S. Government Fund (the "Portfolio"), a diversified series
of John Hancock Bond Fund (the "Trust"), in addition to the information that is
contained in the Portfolio's Prospectus, dated May 15, 1995.
This SAI is not a prospectus. It should be read in conjunction with
the Prospectus, a copy of which can be obtained free of charge by writing or
telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
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TABLE OF CONTENTS
<CAPTION>
Statement of Cross
Additional Referenced
Information to Prospectus
Page Page
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Organization of the Trust...................... 2 7
Investment Objective and Policies.............. 2 5
Certain Investment Practices................... 2 16
Investment Restrictions........................ 5 5
Those Responsible for Management............... 7 7
Investment Advisory and Other Services......... 13 7
Distribution Contract.......................... 16 N/A
Net Asset Value................................ 17 13
Purchase of Shares............................. 17 10
Special Redemptions............................ 17 13
Description of the Portfolio's Shares.......... 17 7
Tax Status..................................... 19 8
Calculation of Performance..................... 21 10
Brokerage Allocation........................... 23 N/A
Transfer Agent Services........................ 24 Back Cover
Custody of Portfolio........................... 25 Back Cover
Independent Auditors........................... 25 Back Cover
Financial Statements........................... F-1 3
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ORGANIZATION OF THE TRUST
The Trust is an open-end management investment company organized as a
Massachusetts business trust under a Declaration of Trust dated December 12,
1984. The Trust currently has six series.
The Portfolio is managed by John Hancock Advisers, Inc. (the
"Adviser"), a wholly-owned indirect subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), chartered in 1862 with national
headquarters at John Hancock Place, Boston, Massachusetts. John Hancock Funds,
Inc. ("John Hancock Funds") acts as principal distributor of the shares of the
Portfolio.
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio seeks, as its primary investment objective, a high level
of current income consistent with low volatility of principal. Under normal
circumstances, at least 65% of the Portfolio's total assets will be invested in
adjustable rate mortgage securities ("ARMs") and pass-through securities
representing interests in loan pools and having periodic interest rate resets,
which in each case are U.S. Government Securities.
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES AND INSTRUMENTALITIES.
In addition to U.S. Government Securities which are adjustable rate mortgage
securities and other pass through securities representing interests in loan
pools and having periodic interest rate resets, the Portfolio may invest in a
variety of other securities issued or guaranteed as to principal and interest
by the U.S. Government, its agencies and instrumentalities. U.S. Treasury
Bills, notes and bonds are supported by the full faith and credit of the United
States. Other U.S. Government Securities are supported either by the full
faith and credit of the U.S. Government (such as securities of the Small
Business Administration), the right of the issuer to borrow from the Treasury
(such as securities of the Federal Home Loan Banks), the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association), or only the credit of
the issuer. No assurance can be given that the U.S. Government will provide
financial support of U.S. Government agencies, authorities or instrumentalities
in the future.
The Portfolio may also invest in separately U.S. traded principal and
interest components of securities guaranteed or issued by the U.S. Treasury if
such components are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ("STRIPS").
Other investments of the Portfolio are set forth below under "Certain
Investment Practices."
CERTAIN INVESTMENT PRACTICES
Lending of Portfolio Securities. In order to generate additional
income, the Portfolio may, from time to time, lend securities from its
portfolio to brokers, dealers and financial institutions such as banks and
trust companies. Such loans will be secured by collateral consisting of cash
or U.S. Government Securities which will be maintained in an amount equal to at
least
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100% of the current market value of the loaned securities. During the period
of each loan, the Portfolio will receive the income on both the loaned
securities and the collateral and thereby increase its return. Cash collateral
will be invested in short-term high quality debt securities, which will
increase the current income of the Portfolio. The loans will be terminable by
the Portfolio at any time and by the borrower on one day's notice. The
Portfolio will have the right to regain record ownership of loaned
securities to exercise beneficial rights such as rights to interest or other
distributions or voting rights on important issues. The Portfolio may pay
reasonable fees to persons unaffiliated with the Portfolio for services in
arranging such loans. Lending of portfolio securities involves a risk of
failure by the borrower to return the loaned securities, in which event the
Portfolio may incur a loss.
SECURITIES TRANSACTIONS SUBJECT TO DELAYED SETTLEMENT. As described
under "Investments, Techniques and Risk Factors" in the Prospectus, securities
purchased for which the normal settlement date occurs later than the settlement
date which is normal for U.S. Treasury obligations and the securities held in
the Portfolio are subject to changes in value (both experiencing appreciation
when interest rates decline and depreciation when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and changes,
real or anticipated, in the level of interest rates. Purchasing securities
subject to delayed settlement can involve a risk that the yields available in
the market when the delivery takes place may actually be higher than those
obtained in the transaction itself. A separate account of the Portfolio
consisting of cash or liquid debt securities equal to the amount of the delayed
settlement commitments will be established at the Trust's custodian bank. For
the purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market value using the valuation
procedures for all other investments. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Portfolio. On the settlement date of these delayed
settlement securities, the Portfolio will meet its obligations from then
available cash flow, sale of securities held in the separate account, sale of
other securities or, although it would not normally expect to do so, from sale
of the delayed settlement securities themselves (which may have a value greater
or lesser than the Portfolio's payment obligations). Sale of securities to meet
such obligations will generally result in the realization of capital gains or
losses.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Portfolio may
purchase securities on a when-issued or forward commitment basis.
"When-issued" refers to securities whose terms are available and for which a
market exists, but which have not been issued. The Portfolio will engage in
when-issued transactions with respect to securities purchased for its portfolio
in order to obtain what is considered to be an advantageous price and yield at
the time of the transaction. For when-issued transactions, no payment is made
until delivery is due, often a month or more after the purchase. In a forward
commitment transaction, the Portfolio contracts to purchase securities for a
fixed price at a future date beyond customary settlement time.
When the Portfolio engages in forward commitment and when-issued
transactions, it relies on the seller to consummate the transaction. The
failure of the issuer or seller to consummate the transaction may result in the
Portfolio losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued and forward
commitment basis also involves a risk of loss if the value of the security to
be purchased declines prior to the settlement date.
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On the date the Portfolio enters into an agreement to purchase
securities on a when-issued or forward commitment basis, the Portfolio will
segregate in a separate account cash or liquid, high grade debt securities
equal in value to the Portfolio's commitment. These assets will be valued
daily at market, and additional cash or securities will be segregated in a
separate account to the extent that the total value of the assets in the
account declines below the amount of the when- issued commitments.
Alternatively, the Portfolio may enter into offsetting contracts for the
forward sale of other securities that it owns.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements. A repurchase agreement is a contract under which the Portfolio
would acquire a security for a relatively short period (generally not more than
7 days) subject to the obligation of the seller to repurchase and the Portfolio
to resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). The Portfolio will enter into repurchase agreements only
with member banks of the Federal Reserve System and with securities dealers.
The Adviser will continuously monitor the creditworthiness of the parties with
whom the Portfolio enters into repurchase agreements. The Portfolio has
established a procedure providing that the securities serving as collateral for
each repurchase agreement must be delivered to the Portfolio's custodian either
physically or in book-entry form and that the collateral must be marked to
market daily to ensure that each repurchase agreement is fully collateralized
at all times. In the event of bankruptcy or other default by a seller of a
repurchase agreement, the Portfolio could experience delays in liquidating the
underlying securities and could experience losses, including the possible
decline in the value of the underlying securities during the period which the
Portfolio seeks to enforce its rights thereto, possible subnormal levels of
income and lack of access to income during this period, and the expense of
enforcing its rights.
REVERSE REPURCHASE AGREEMENTS. As briefly described in its Prospectus,
the Portfolio may also enter into reverse repurchase agreements which involve
the sale of securities held in the Portfolio to a bank or securities firm with
an agreement that the Portfolio will buy back the securities at a fixed future
date at a fixed price plus an agreed amount of interest which may be reflected
in the repurchase price. Reverse repurchase agreements are considered to be
borrowings by the Portfolio. The Portfolio will use proceeds obtained from the
sale of securities pursuant to reverse repurchase agreements to purchase other
investments. The use of borrowed funds to make investments is a practice known
as "leverage," which is considered speculative. Use of reverse repurchase
agreements is an investment technique that is intended to increase income.
Thus, the Portfolio will enter into a reverse repurchase agreement only when
the Adviser determines that the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. However there is a risk that interest expense will nevertheless
exceed the income earned. Reverse repurchase agreements involve the risk that
the market value of securities purchased by the Portfolio with proceeds of the
transaction may decline below the repurchase price of the securities sold by
the Portfolio which it is obligated to repurchase. The Portfolio would also
continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting their repurchase. To minimize various risks associated with
reverse repurchase agreements, the Portfolio would establish and maintain with
the Portfolio's custodian a separate account consisting of highly liquid,
marketable securities in an amount at least equal to the repurchase prices of
the securities (plus any accrued interest thereon) under such agreements. In
addition, the Portfolio would not enter into reverse repurchase agreements
exceeding in the aggregate 33 1/3% of the value of its total net assets
(including for this purpose other borrowings of the Portfolio). The Portfolio
will enter into reverse repurchase agreements only with selected registered
broker/ dealers or with federally insured banks or savings and loan
associations which are approved in
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advance as being creditworthy by the Trustees. Under procedures established by
the Trustees, the Adviser will monitor the creditworthiness of the firms
involved.
INVESTMENT RESTRICTIONS
The Portfolio has adopted the following fundamental investment
restrictions. These restrictions may not be changed without approval by
holders of a majority of the outstanding shares of the Portfolio. A majority
for this purpose means the holders of: (a) more than 50% of the outstanding
shares, or (b) 67% or more of the shares represented at a meeting where more
that 50% of the outstanding shares are represented, whichever is less.
The Portfolio may not:
(1) borrow money, except as a temporary measure for extraordinary or
emergency purposes the Portfolio may borrow from banks in aggregate
amounts at any one time outstanding not exceeding 33 1/3% of the total
assets (including the amount borrowed) of the Portfolio, valued at market;
and the Portfolio may not purchase any securities at any time when
borrowings exceed 5% of the total assets of the Portfolio (taken at market
value). This borrowing restriction does not prohibit the use of reverse
repurchase agreements (see "Reverse Repurchase Agreements"). For purposes
of this investment restriction, forward commitment transactions shall not
constitute borrowings. Interest paid on any borrowings will reduce the
Portfolio's net investment income.
(2) make short sales of securities or purchase any security on margin, except
that the Portfolio may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities (this restriction
does not apply to securities purchased on a when-issued basis);
(3) underwrite securities issued by other persons, except insofar as the
Portfolio may technically be deemed an underwriter under the
Securities Act of 1933 in selling a security;
(4) make loans to other persons except (a) through the lending of securities
held by the Portfolio, (b) through the purchase of debt securities in
accordance with the investment policies of the Portfolio (the entry
into repurchase agreements is not considered a loan for purposes of this
restriction).
(5) with respect to 75% of its total assets, purchase the securities of any
one issuer (except securities issued or guaranteed by the U.S. Government
and its agencies or instrumentalities, as to which there are no percentage
limits or restrictions) if immediately after and as a result of such
purchase (a) more than 5% of the value of its assets would be invested in
that issuer, or (b) the Portfolio would hold more than 10% of the
outstanding voting securities of that issuer.
(6) purchase or sell real estate (including limited partnership interests)
other than securities secured by real estate or interests therein
including mortgage-related securities, interests in oil, gas or
mineral leases in the ordinary course of business (the Portfolio reserves
the freedom of action to hold and to sell real estate acquired as a result
of the ownership of securities).
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(7) invest more than 25% of its total assets in the securities of issuers
whose principal business activities are in the same industry (excluding
obligations of the U.S. Government and repurchase agreements).
(8) issue any senior security (as that term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), if such issuance is
specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder.
(9) invest in illiquid securities, including repurchase agreements maturing
in more than seven days but excluding securities which may be resold
pursuant to Rule 144A under the Securities Act of 1933, if, as a result
thereof, more than 10% of the net assets (taken at market value at the
time of each investment of the Portfolio, as the case may be) would be
invested in such securities.
(10) Invest in securities of any company if, to the knowledge of the Trust,
any officer or director of the Trust or its Adviser owns more than 1/2 of
1% of the outstanding securities of such company, and all such officers
and directors own in the aggregate more than 5% of the outstanding
securities of such company.
The Portfolio has also adopted the following additional operating
restrictions that may be required by various laws and administrative positions.
These operating restrictions are not fundamental policies and may be changed by
the Portfolio without approval of its shareholders.
Under those operating restrictions, the Portfolio may not:
(a) invest in companies for the purpose of exercising control or management;
(b) make investments in the securities of other investment companies, except
as otherwise permitted by the 1940 Act or in connection with a
merger, consolidation, or reorganization;
(c) invest in securities of issuers (other than U.S. Government Securities)
having a record of less than three years of continuous operation (for this
purpose, the period of operation of any issuer shall include the period of
operation of any predecessor or unconditional guarantor or such
issuer) if, regarding all securities, more than 5% of the total assets
(taken at market value at the time of each investment) of the Portfolio,
as the case may be would be invested in such securities;
(d) invest in commodities and commodity futures contracts, put or call options
or any combination thereof;
(e) mortgage, pledge, hypothecate or in any manner transfer, as security for
indebtedness, any securities owned by the Portfolio except as may be
necessary in connection with borrowings mentioned in (1) above; or
(f) purchase warrants of any issuer, except on a limited basis, if, as a
result, more than 2% of the value of its total assets would be invested in
warrants which are not listed on the New York Stock Exchange and more
than 5% of the value of its total assets would be invested in warrants,
whether or not so listed, such warrants in each case to be valued at the
lesser
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of cost or market, but assigning no value to warrants acquired by the
Portfolio in units or attached to debt securities.
Pursuant to an undertaking with a certain state in connection with the
registration of shares of John Hancock Adjustable U.S. Government Trust (the
"Fund") (which invests its shares in the Portfolio), neither the Fund nor the
Portfolio will invest more than 15% of its respective net assets in illiquid
and restricted securities so long as such shares are registered for sale in
such state.
THOSE RESPONSIBLE FOR MANAGEMENT
The businesses of the Portfolio and the Fund are managed by the
Trustees who elect officers who are responsible for the day-to-day operations
of the Portfolio and the Fund and who execute policies formulated by the
Trustees. Several of the officers and Trustees of the Portfolio and the Fund
are also officers and directors of the Adviser or officers and directors of
John Hancock Funds.
<TABLE>
Set forth below is the principal occupation or employment of the
Trustees and officers of the Trust during the past five years.
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
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Edward J. Boudreau, Jr.* Trustee, Chairman and Chief Executive
101 Huntington Avenue Chairman and Officer, the Adviser and The
Boston, MA 02199 Chief Executive Berkeley Financial Group
Officer(1)(2) ("The Berkeley Group");
Chairman, NM Capital
Management, Inc. ("NM
Capital"); John Hancock
Advisers International Limited
("Advisers International");
John Hancock Funds, Inc.;
John Hancock Investor
Services Corporation
("Investor Services"); and
Sovereign Asset Management
Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Inc., Investor
Services and SAMCorp are
collectively referred to as the
"Affiliated Companies");
Chairman, First Signature
Bank & Trust; Director, John
Hancock Freedom Securities
Corporation, John Hancock
Capital Corporation, New
</TABLE>
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<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
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England/Canada Business
Council; Member, Investment
Company Institute Board of
Governors; Trustee, Museum
of Science; President, the
Adviser (until July 1992);
Trustee or Director of other
investment companies
managed by the Adviser; and
Chairman, John Hancock
Distributors, Inc. (until April,
1994).
James F. Carlin Trustee Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc. (insurance);
Natick, MA 01760 Director, Arbella Mutual
Insurance Company
(insurance), Consolidated
Group Trust (group health
plan), Carlin Insurance
Agency, Inc. and West
Insurance Agency, Inc.;
Receiver, the City of Chelsea
(until August 1992); and
Trustee or Director of other
investment companies
managed by the Adviser.
William H. Cunningham Trustee Chancellor, University of
601 Colorado Street Texas System and former
O'Henry Hall President of the University of
Austin, TX 78701 Texas, Austin, Texas; Regents
Chair in Higher Education
Leadership; James L. Bayless
Chair for Free Enterprise;
Professor of Marketing and
Dean College of Business
Administration/Graduate
School of Business
(1983-1985); Centennial Chair
in Business Education
Leadership, 1983-1985;
Director, LaQuinta Motor Inns,
Inc. (hotel management
company); Director,
Jefferson-Pilot Corporation
(diversified life insurance
company); Director,
Freeport-McMoran Inc. (oil
and gas company); Director,
</TABLE>
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<TABLE>
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POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
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Barton Creek Properties, Inc.
(1988-1990) (real estate
development) and LBJ
Foundation Board (education
foundation); and Advisory
Director, Texas Commerce
Bank - Austin.
Charles L. Ladner Trustee(3) Director, Energy North, Inc.
UGI Corporation (public utility holding
460 North Gulph Road company); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
(public utility holding
company) (until 1992); and
Trustee or Director of other
investment companies
managed by the Adviser.
Leo E. Linbeck, Jr. Trustee Chairman, President, Chief
3810 W. Alabama Executive Officer and
Houston, TX 77027 Director, Linbeck Corporation
(a holding company engaged
in various phases of the
construction industry and
warehousing interests);
Director and Chairman,
Federal Reserve Bank of
Dallas; Chairman of the Board
and Chief Executive Officer,
Linbeck Construction
Corporation; Director,
Panhandle Eastern Corporation
(a diversified energy
company); Director, Daniel
Industries, Inc. (manufacturer
of gas measuring products and
energy related equipment);
Director, GeoQuest
International, Inc. (a
geophysical consulting firm);
and Director, Greater Houston
Partnership.
Patricia P. McCarter Trustee(3) Director and Secretary, the
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer); and Trustee or
Malvern, PA 19355 Director of other investment
companies managed by the
Adviser.
</TABLE>
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<TABLE>
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POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
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Steven R. Pruchansky Trustee(1)(3) Director and Treasurer, Mast
360 Horse Creek Drive, #208 Holdings, Inc.; Director,
Naples, FL 33942 First Signature Bank & Trust
Company (until August 1991);
General Partner, Mast Realty
Trust; President, Maxwell
Building Corp. (until 1991);
and Trustee or Director of
other investment companies
managed by the Adviser.
Norman H. Smith Trustee(3) Lieutenant General, USMC,
Rt. 1, Box 249 E Deputy Chief of Staff for
Linden, VA 22642 Manpower and Reserve
Affairs, Headquarters Marine
Corps; Commanding General
III Marine Expeditionary
Force/3rd Marine Division
(retired 1991); and Trustee or
Director of other investment
companies managed by the
Adviser.
John P. Toolan Trustee(3) Director, The Smith Barney
13 Chadwell Place Muni Bond Funds, The Smith
Morristown, NJ 07960 Barney Tax-Free Money Fund,
Inc., Vantage Money Market
Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment
company) and Smith Barney
Trust Company of Florida;
Chairman, Smith Barney Trust
Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management
Company and Smith, Barney
Advisers, Inc. (investment
advisers) (retired 1991); and
Senior Executive Vice
President, Director and
member of the Executive
Committee, Smith Barney,
Harris Upham & Co.,
Incorporated (investment
bankers) (until 1991); and
Trustee or Director of other
investment companies
managed by the Adviser.
</TABLE>
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<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
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Robert G. Freedman* Vice Chairman President and Chief
101 Huntington Avenue and Chief Investment Officer, the
Boston, MA 02199 Investment Adviser.
Officer(2)
Anne C. Hodsdon* President(2) Executive Vice President, the
101 Huntington Avenue Adviser.
Boston, MA 02199
James B. Little* Senior Vice Senior Vice President, the
101 Huntington Avenue President and Adviser.
Boston, MA 02199 Chief Financial
Officer
Thomas H. Drohan* Senior Vice Senior Vice President and
101 Huntington Avenue President and Secretary, the Adviser.
Boston, MA 02199 Secretary
Michael P. DiCarlo* Senior Vice Senior Vice President, the
101 Huntington Avenue President(2) Adviser.
Boston, MA 02199
Edgar Larsen* Senior Vice Senior Vice President, the
101 Huntington Avenue President Adviser.
Boston, MA 02199
B.J. Willingham* Senior Vice Senior Vice President, the
101 Huntington Avenue President Adviser. Formerly, Director
Boston, MA 02199 and Chief Investment Officer
of Transamerica Fund
Management Company.
James J. Stokowski* Vice President Vice President, the Adviser.
101 Huntington Avenue and Treasurer
Boston, MA 02199
Susan S. Newton* Vice President Vice President and Assistant
101 Huntington Avenue and Compliance Secretary, the Adviser.
Boston, MA 02199 Officer
John A. Morin* Vice President Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
</TABLE>
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________________________
* An "interested person" of the Portfolio, as such term is defined in the
1940 Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of
Trust, the Executive Committee may generally exercise most of the powers
of the Board of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Committee on Administration.
(4) A Member of the Audit, Administration and Compensation Committees.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which
the Adviser serves as investment adviser.
As of April 28, 1995, there were 2,261,487 shares of the Portfolio
outstanding and officers and trustees of the Portfolio as a group beneficially
owned less than 1% of these outstanding shares. At such date, the Fund held of
record 100% of the shares outstanding. Such ownership by the Fund,
representing an interest of more than 25% of the outstanding shares of the
Portfolio, results in the presumption of "control" as defined under the 1940
Act and has the result that the Fund can materially affect a positive or
negative vote on any matters which require the vote of all shareholders of the
Portfolio.
As of April 28, 1995, there were 2,261,487 shares of Adjustable
Government Fund outstanding and officers and trustees of Adjustable Government
Fund as a group beneficially owned less than 1% of these outstanding shares.
At such date, Merrill Lynch Pierce Fenner & Smith, Inc., Jacksonville, Florida
held of record 213,732 shares representing approximately 9% of the shares
outstanding of Adjustable Government Fund. At such date, no other person owned
of record or beneficially as much as 5% of the outstanding shares of Adjustable
Government Fund.
As of December 22, 1994, the Trustees have established an Advisory
Board which acts to facilitate a smooth transition of management over a
two-year period (between Transamerica Fund Management Company ("TFMC"), the
prior investment adviser, and the Adviser). The members of the Advisory Board
are distinct from the Board of Trustees, do not serve the Portfolio in any
other capacity and are persons who have no power to determine what securities
are purchased or sold on behalf of the Portfolio. Each member of the Advisory
Board may be contacted at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal
occupations during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management
services); former Chairman of the Board, Mosher Steel Company.
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Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman
from Texas; co-founder, Houston Parents' League; former board member of
various civic and cultural organizations in Houston, including the Houston
Symphony, Museum of Fine Arts and YWCA. Mrs. Bentsen is presently
active in various civic and cultural activities in the Washington, D.C.
area, including membership on the Area Board for The March of Dimes and is
a National Trustee for the Botanic Gardens of Washington, D.C.
Thomas R. Powers, Formerly Chairman of the Board, President and
Chief Executive Officer, TFMC; Director, West Central Advisory Board,
Texas Commerce Bank; Trustee, Memorial Hospital System; Chairman of the
Board of Regents of Baylor University; Member, Board of Governors,
National Association of Securities Dealers, Inc.; Formerly, Chairman,
Investment Company Institute; formerly, President, Houston Chapter of
Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company;
Director, Houston Industries and Houston Lighting and Power Company;
Director, TransAmerican Companies (natural gas producer and
transportation); Member, Board of Managers, Harris County Hospital
District; Advisory Director, Commercial State Bank, El Campo; Advisory
Director, First National Bank of Bryan; Advisory Director, Sterling
Bancshares; Former Director and Vice Chairman, Texas Commerce Bancshares;
and Vice Chairman, Texas Commerce Bank.
COMPENSATION OF THE BOARD OF TRUSTEES AND ADVISORY BOARD. Each
Independent Trustee receives an annual retainer of $44,000, a meeting fee of
$4,000 for each of the four regularly scheduled meetings held during the year
and a fee of $25 per day or actual travel expenses, whichever is greater. This
compensation is apportioned among the John Hancock funds, including the
Portfolio, on which such Trustees serve based on the net asset values of such
funds. Advisory Board Members receive from the John Hancock funds an annual
retainer of $40,000 and a meeting fee of $7,000 for each of the two regularly
scheduled meetings to be held in 1995 and the one in 1996. For the fiscal year
ended March 31, 1994, the Trust paid Trustees' fees in the aggregate of $26,337
to all the Trustees then serving as such.
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Portfolio receives its investment
advice from the Adviser. Investors should refer to the Prospectus for a
description of certain information concerning the investment management
contract. Each of the Trustees and principal officers affiliated with the
Portfolio who is also an affiliated person of the Adviser is named above,
together with the capacity in which such person is affiliated with the
Portfolio, the Adviser or TFMC (the Portfolio's prior investment adviser).
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and currently has more than $13 billion in
assets under management in its capacity as investment adviser to the Portfolio
and the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,060,000 shareholders.
The Adviser is a wholly-owned subsidiary of The Berkeley Financial Group, which
is in turn a wholly-owned subsidiary of John Hancock Subsidiaries, Inc., which
is in turn a wholly-owned subsidiary of the Life Company, one of the most
recognized and respected financial institutions in the nation. With total
assets under management of over $80 billion, the
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Life Company is one of the ten largest life insurance companies in the United
States and carries Standard & Poor's and A.M. Best's highest ratings.
Founded in 1862, the Life Company has been serving clients for over 130 years.
As described in the Prospectus under the caption "Organization and
Management of the Fund," the Portfolio has entered into an investment
management contract with the Adviser. Under the investment management
contract, the Adviser provides the Portfolio with (i) a continuous investment
program, consistent with the Portfolio's stated investment objective and
policies, (ii) supervision of all aspects of the Portfolio's operations except
those that are delegated to a custodian, transfer agent or other agent and
(iii) such executive, administrative and clerical personnel, officers and
equipment as are necessary for the conduct of its business. The Adviser is
responsible for the day-to-day management of the Portfolio's assets.
No person other than the Adviser and its directors and employees
regularly furnishes advice to the Portfolio with respect to the desirability of
the Portfolio investing in, purchasing or selling securities. The Adviser may
from time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life
Company and its affiliates.
Under the terms of the investment management contract with the
Portfolio, the Adviser provides the Portfolio with office space, equipment and
supplies and other facilities and personnel required for the business of the
Portfolio. The Adviser pays the compensation of all officers and employees of
the Portfolio and pays the expenses of clerical services relating to the
administration of the Portfolio. All expenses which are not specifically paid
by the Adviser and which are incurred in the operation of the Portfolio,
including, but not limited to, (i) the fees of the Trustees of the Portfolio
who are not "interested persons," as such term is defined in the 1940 Act (the
"Independent Trustees"), (ii) the fees of the members of the Portfolio's
Advisory Board (described above) and (iii) the continuous public offering of
the shares of the Portfolio are borne by the Portfolio.
As provided by the investment management contract, the Portfolio pays
the Adviser an investment management fee, which is accrued daily and paid
monthly in arrears, equal on an annual basis to 0.40% of the Portfolio's
average daily net asset value.
Payment due the Adviser at the end of the first month shall be 1/12 of
the annual fees, based on average daily net assets of the Portfolio for that
month. At the end of each successive month, the Adviser shall be entitled to a
proportionate part of the annual fees, based on average net assets from the
first day of the fiscal year of the Portfolio through the last day of the
month for which payments is made, less any previous payments made to the
Adviser during such fiscal year.
The Adviser may voluntarily and temporarily reduce its advisory fee or
make other arrangements to limit the Portfolio's expenses to a specified
percentage of average daily net assets. The Adviser retains the right to
re-impose the advisory fee and recover any other payments to the extent that,
at the end of any fiscal year, the Portfolio's annual expenses fall below this
limit.
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In the event normal operating expenses of the Portfolio, exclusive of
certain expenses prescribed by state law, are in excess of any state limit
where the Portfolio is registered to sell shares of beneficial interest, the
fee payable to the Adviser will be reduced to the extent of such excess and the
Adviser will make any additional arrangements necessary to eliminate any
remaining excess expenses. Currently, the most restrictive limit applicable to
the Portfolio is 2.5% of the first $30,000,000 of the Portfolio's average daily
net asset value, 2% of the next $70,000,000 and 1.5% of the remaining average
daily net asset value.
Pursuant to the investment management contract, the Adviser is not
liable to the Portfolio or its shareholders for any error of judgment or
mistake of law or for any loss suffered by the Portfolio in connection with the
matters to which the contract relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from its reckless disregard of the obligations and
duties under the applicable contract.
The initial term of the investment management contract expires on
December 22, 1996 and it will continue in effect from year to year thereafter
if approved annually by a vote of a majority of the Independent Trustees of the
Portfolio, cast in person at a meeting called for the purpose of voting on such
approval, and by either a majority of the Trustees or the holders of a majority
of the Portfolio's outstanding voting securities. The management contract may,
on 60 days' written notice, be terminated at any time without the payment of
any penalty to the Portfolio by vote of a majority of the outstanding voting
securities of the Portfolio, by the Trustees or by the Adviser. The management
contract terminates automatically in the event of its assignment.
Securities held by the Portfolio may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates provide
investment advice. Because of different investment objectives or other
factors, a particular security may be bought for one or more funds or clients
when one or more are selling the same security. If opportunities for purchase
or sale of securities by the Adviser or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made, insofar as feasible,
for the respective funds or clients in a manner deemed equitable to all of
them. To the extent that transactions on behalf of more than one client of the
Adviser or its respective affiliates may increase the demand for securities
being purchased or the supply of securities being sold, there may be an adverse
effect on price.
Under the investment management contract, the Portfolio may use the
name "John Hancock" or any name derived from or similar to it only for as long
as the investment management contract or any extension, renewal or amendment
thereof remains in effect. If the Portfolio's investment management contract
is no longer in effect, the Portfolio (to the extent that it lawfully can) will
cease to use such name or any other name indicating that it is advised by or
otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the non-exclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
For the period December 31, 1991 through March 31, 1992 and the fiscal
years ended March 31, 1993 and 1994, advisory fees payable by the Portfolio to
TFMC, the Portfolio's former investment adviser, amounted to $5,480, $123,662
and $184,072, respectively; however, a portion of such fees were not imposed
pursuant to the voluntary fee and expense limitation arrangements then in
effect (see "The Portfolio's and the Fund's Expenses" in the Prospectus).
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ADMINISTRATIVE SERVICES AGREEMENT. The Portfolio was a party to an
administrative services agreement with TFMC (the "Services Agreement"),
pursuant to which TFMC performed bookkeeping and accounting services and
functions, including preparing and maintaining various accounting books,
records and other documents and keeping such general ledgers and portfolio
accounts as are reasonably necessary for the operation of the Portfolio. Other
administrative services included communications in response to shareholder
inquiries and certain printing expenses of various financial reports. In
addition, such staff and office space, facilities and equipment was provided as
necessary to provide administrative services to the Portfolio. The Services
Agreement was amended in connection with the appointment of the Adviser as
adviser to the Portfolio to permit services under the Agreement to be provided
to the Portfolio by the Adviser and its affiliates. The Services Agreement was
terminated during the current fiscal year.
For the period December 31, 1991 through March 31, 1992, and for the
fiscal years ended March 31, 1993 and 1994, the Portfolio paid TFMC (pursuant
to the Services Agreement) $3,099, $37,033 and $38,012, respectively, of which
$3,099, $26,189 and $26,722, respectively, was paid to TFMC and $0, $10,844 and
$11,290, respectively, were paid for certain data processing and pricing
information services.
DISTRIBUTION CONTRACT
As discussed in the Prospectus, the Portfolio's shares are sold on a
continuous basis at the public offering price. John Hancock Funds, a
wholly-owned subsidiary of the Adviser, has the exclusive right, pursuant to
the Distribution Contract dated December 22, 1994 (the "Distribution
Contract"), to purchase shares from the Portfolio at net asset value for resale
to the public or to broker-dealers at the public offering price. Upon notice
to all broker-dealers ("Selling Brokers") with whom it has sales agreements,
John Hancock Funds may allow such Selling Brokers up to the full applicable
sales charge during periods specified in such notice. During these periods,
such Selling Brokers may be deemed to be underwriters as that term is defined
in the Securities Act of 1933.
The Distribution Contract was initially adopted by the affirmative vote
of the Portfolio's Board of Trustees including the vote of a majority of the
Independent Trustees, cast in person at a meeting called for such purpose. The
Distribution Contract shall continue in effect until December 22, 1996 and from
year to year thereafter if approved by either the vote of the Portfolio's
shareholders or the Board of Trustees, including the vote of a majority of the
Independent Trustees, cast in person at a meeting called for such purpose. The
Distribution Contract may be terminated at any time, without penalty, by either
party upon sixty (60) days' written notice or by a vote of a majority of the
outstanding voting securities of the Portfolio and terminates automatically in
the case of an assignment by John Hancock Funds.
When the Portfolio seeks an Independent Trustee to fill a vacancy or as
a nominee for election by shareholders, the selection or nomination of the
Independent Trustee is, under resolutions adopted by the Trustees
contemporaneously with their adoption of the Plans, committed to the discretion
of the Committee on Administration of the Trustees. The members of the
Committee on Administration are all Independent Trustees and identified in this
Statement of Additional Information under the heading "Those Responsible for
Management."
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NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the
Portfolio's shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without
exclusive reliance upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost, which approximates market
value. If market quotations are not readily available or if in the opinion of
the Adviser any quotation or price is not representative of true market value,
the fair value of the security may be determined in good faith in accordance
with procedures approved by the Trustees.
The Portfolio will not price its securities on the following national
holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
PURCHASE OF SHARES
Shares of the Portfolio are offered at a price equal to their net asset
value. Share certificates will not be issued unless requested by the
shareholder in writing, and then only will be issued for full shares. The
Board of Trustees reserves the right to change or waive the minimum investment
requirements and to reject any order to purchase shares when in the judgment of
the Adviser such rejection is in the Portfolio's best interest.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Portfolio has the right to
pay the redemption price of shares of the Portfolio in whole or in part in
portfolio securities as prescribed the Trustees. When the shareholder sells
portfolio securities received in this fashion, he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Portfolio
has elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to which
the Portfolio is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Portfolio during any 90 day period
for any one account.
DESCRIPTION OF THE PORTFOLIO'S SHARES
Ownership in the Portfolio is represented by transferable shares of
beneficial interest. The Declaration of Trust permits the Trustees to create
an unlimited number of series and classes of shares of the Trust and, with
respect to each series and class, to issue an unlimited number of full or
fractional shares and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests of the series.
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Each share of each series or class of the Trust represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Trust is separate
and distinct. All consideration received for the sales of shares of a
particular series or class of the Trust, all assets in which such consideration
is invested and all income, earnings and profits derived from such investments
will be allocated to and belong to that series or class. As such, each such
share is entitled to dividends and distributions out of the net income
belonging to that series or class as declared by the Board of Trustees. Shares
of the Trust have a par value of $0.01 per share. The assets of each series
are segregated on the Trust's books and are charged with the liabilities of
that series and with a share of the Trust's general liabilities. The Board of
Trustees determines those assets and liabilities deemed to be general assets or
liabilities of the Trust, and these items are allocated among each series in
proportion to the relative total net assets of each series. In the unlikely
event that the liabilities allocable to a series exceed the assets of that
series, all or a portion of such liabilities may have to be borne by the other
series.
Pursuant to the Declaration of Trust, the Trustees have established six
series of shares, including the Portfolio, and may authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes within any
series (which would be used to distinguish among the rights of different
categories of shareholders, as might be required by future regulations or other
unforeseen circumstances). The five other series of Trust are John Hancock
Intermediate Government Trust, John Hancock Adjustable U.S. Government Trust,
John Hancock Investment Quality Bond Fund, John Hancock U.S. Government Trust
and John Hancock Government Securities Trust.
VOTING RIGHTS. Shareholders are entitled to a full vote for each full
share held. The Trustees themselves have the power to alter the number and the
terms of office of Trustees, and they may at any time lengthen their own terms
or make their terms of unlimited duration (subject to certain removal
procedures) and appoint their own successors, provided that at all times at
least a majority of the Trustees have been elected by shareholders. The voting
rights of shareholders are not cumulative, so that holders of more than 50% of
the shares voting can, if they choose, elect all Trustees being voted upon,
while the holders of the remaining shares would be unable to elect any
Trustees. Although the Trust need not hold annual meetings of shareholders,
the Trustees may call special meetings of shareholders for action by
shareholder vote as may be required by the 1940 Act or the Declaration of
Trust. Also, a shareholders' meeting must be called if so requested in writing
by the holders of record of 10% or more of the outstanding shares of the Trust.
In addition, the Trustees may be removed by the action of the holders of record
of two-thirds or more of the outstanding shares.
SHAREHOLDER LIABILITY. The Declaration of Trust provides that no
Trustee, officer, employee or agent of the Trust is liable to the Trust or any
series or to a shareholder, nor is any Trustee, officer, employee or agent
liable to any third persons in connection with the affairs of the Trust, except
as such liability may arise from his or its own bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties. It also provides that
all third persons shall look solely to the particular series' property for
satisfaction of claims arising in connection with the affairs of that series.
With the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Trust.
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As a Massachusetts business trust, the Trust is not required to issue
share certificates. The Trust shall continue without limitation of time
subject to the provisions in the Declaration of Trust concerning termination by
action of the shareholders.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Trust's Declaration of Trust contains
an express disclaimer of shareholder liability for acts, obligations and
affairs of the Trust. The Declaration of Trust also provides for
indemnification out of the Trust's assets for all losses and expenses of any
shareholder held personally liable by reason of being or having been a
shareholder. Liability is therefore limited to circumstances in which the
Trust itself would be unable to meet its obligations, and the possibility of
this occurrence is remote.
TAX STATUS
The Portfolio is treated as a separate entity for accounting and tax
purposes. The Portfolio has qualified and elected to be treated as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") and intends to continue to so qualify in the
future. As such and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions, and the
diversification of its assets, the Portfolio will not be subject to Federal
income tax on its net income (including net short-term and long-term capital
gains) which is distributed to shareholders at least annually in accordance
with the timing requirements of the Code.
The Portfolio will be subject to a 4% non-deductible Federal excise tax
on certain amounts not distributed (and not treated as having been distributed)
on a timely basis in accordance with annual minimum distribution requirements.
The Portfolio intends under normal circumstances to avoid liability for such
tax by satisfying such distribution requirements.
Distributions from the Portfolio's current or accumulated earnings and
profits ("E&P"), as computed for Federal income tax purposes, will be taxable
as described in the Portfolio's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Portfolio shares and
thereafter (after such basis is reduced to zero) will generally give rise to
capital gains. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for Federal income tax purposes in
each share so received equal to the amount of cash they would have received had
they elected to receive the distributions in cash, divided by the number of
shares received.
The Portfolio's dividends and capital gain distributions will not
qualify for the corporate dividends received deduction.
The amount of net short-term and long-term capital gains, if any, in
any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Portfolio to dispose of portfolio securities that will generate capital gains.
At the time of an investor's purchase of Portfolio shares, a portion of the
purchase price is often attributable to realized or unrealized appreciation in
the Portfolio's portfolio. Consequently, subsequent distributions from such
appreciation may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below
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the investor's cost for such shares, and the distributions in reality represent
a return of a portion of the purchase price.
Upon a redemption of shares of the Portfolio (including by exercise of
the exchange privilege) a shareholder may realize a taxable gain or loss
depending upon his basis in his shares. Such gain or loss will be treated as
capital gain or loss if the shares are capital assets in the shareholder's
hands and will be long-term or short-term, depending upon the shareholder's tax
holding period for the shares. Any loss realized on a redemption or exchange
may be disallowed to the extent the shares disposed of are replaced with other
shares of the Portfolio within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of, such as pursuant to the
Dividend Reinvestment Plan. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss. Any loss realized upon the
redemption of shares with a tax holding period of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares.
Although its present intention is to distribute all net short-term and
long-term capital gains, if any, the Portfolio reserves the right to retain and
reinvest all or any portion of its "net capital gain," which is the excess, as
computed for Federal income tax purposes, of net long-term capital gain over
net short-term capital loss in any year. The Portfolio will not in any event
distribute net long-term capital gains realized in any year to the extent that
a capital loss is carried forward from prior years against such gain. To the
extent such excess was retained and not exhausted by the carryforward of prior
years' capital losses, it would be subject to Federal income tax in the hands
of the Portfolio. Each shareholder would be treated for Federal income tax
purposes as if the Portfolio had distributed to him on the last day of its
taxable year his pro rata share of such excess, and he had paid his pro rata
share of the taxes paid by the Portfolio and reinvested the remainder in the
Portfolio. Accordingly, each shareholder would (a) include his pro rata share
of such excess as long-term capital gain income in his return for his taxable
year in which the last day of the Portfolio's taxable year falls, (b) be
entitled either to a tax credit on his return for, or to a refund of, his pro
rata share of the taxes paid by the Portfolio, and (c) be entitled to increase
the adjusted tax basis for his shares in the Portfolio by the difference
between his pro rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, the Portfolio is permitted to carry
forward a net capital loss in any year to offset its own net capital gains, if
any, during the eight years following the year of the loss. To the extent
subsequent net capital gains are offset by such losses, they would not result
in Federal income tax liability to the Portfolio and, as noted above, would not
be distributed as such to shareholders. The Portfolio has $905,314 of capital
loss carryforwards as of the tax year ended December 31, 1994, of which $55,496
expires in 2000, $23,234 in 2001 and $826,584 in 2002, available to offset
future net capital gains.
The Portfolio must accrue income on investments in certain PIKs, zero
coupon securities or certain increasing rate securities (and, in general, any
other securities with original issue discount or with market discount if the
Portfolio elects to include market discount in income currently) prior to the
receipt of the corresponding cash payments. However, the Portfolio must
distribute, at least annually, all or substantially all of its net income,
including such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid Federal income and excise taxes.
Therefore, the Portfolio may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
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Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their
tax advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions. Dividends, capital gain distributions, and
ownership of or gains realized on the redemption (including an exchange) of
Portfolio shares may also be subject to state and local taxes. Shareholders
should consult their own tax advisers as to the Federal, state or local tax
consequences of ownership of shares of, and receipt of distributions from, the
Portfolio in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in the Portfolio is effectively connected will be subject to
U.S. Federal income tax treatment that is different from that described above.
These investors may be subject to nonresident alien withholding tax at the rate
of 30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from the Portfolio and, unless an effective IRS Form W-8 or
authorized substitute is on file, to 31% backup withholding on certain other
payments from the Portfolio. Non-U.S. investors should consult their tax
advisers regarding such treatment and the application of foreign taxes to an
investment in any fund.
The Portfolio is not subject to Massachusetts corporate excise or
franchise taxes. Provided that the Portfolio qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended September 30, 1994, the annualized yield of
the Portfolio was 5.25%. At September 30, 1994, the average annual return for
the Portfolio was 1.28% for the one-year period ended September 30, 1994.
The Portfolio's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price per share on
the last day of the period, according to the following standard formula:
Yield = 2 [ (a-b + 1 )6 -1]
----
cd
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<PAGE> 22
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(NAV where applicable).
The Portfolio's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
P (1 + T)n = ERV
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return
n = number of years
ERV= ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the designated periods or fraction thereof.
This calculation also assumes that all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the period. The
"distribution rate" is determined by annualizing the result of dividing the
declared dividends of the Portfolio during the period stated by the maximum
offering price or net asset value at the end of the period.
In addition to average annual total returns, the Portfolio may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as
a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments, and/or a series of redemptions, over any
time period.
From time to time, in reports and promotional literature, the
Portfolio's yield and total return will be compared to indices of mutual funds
and bank deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper --
Fixed Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on approximately 1,700 fixed income mutual
funds in the United States. Ibbotson and Associates, CDA Weisenberger and F.C.
Towers are also used for comparison purposes, as well a the Russell and
Wilshire Indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
also be utilized.
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The Portfolio's promotional and sales literature may make reference to the
Portfolio's "beta." Beta is a reflection of the market-related risk of the
Portfolio by showing how responsive the Portfolio is to the market.
The performance of the Portfolio is not fixed or guaranteed.
Performance quotations should not be considered to be representations of
performance of the Portfolio for any period in the future. The performance of
the Portfolio is a function of many factors including its earnings, expenses
and number of outstanding shares. Fluctuating market conditions; purchases,
sales and maturities of portfolio securities; sales and redemptions of shares
of beneficial interest; and changes in operating expenses are all examples of
items that can increase or decrease the Portfolio's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities are
made by the Adviser pursuant to recommendations made by its investment
committee, which consists of officers and directors of the Adviser and
affiliates and officers and Trustees who are interested persons of the
Portfolio. Orders for purchases and sales of securities are placed in a manner
which, in the opinion of the Adviser will offer the best price and market for
the execution of each such transaction. Purchases from underwriters of
portfolio securities may include a commission or commissions paid by the issuer
and transactions with dealers serving as market makers reflect a "spread."
Investments in debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on such transactions.
The Portfolio's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing
primary policy, the Rules of Fair Practice of the NASD and other policies that
the Trustees may determine, the Adviser may consider sales of shares of the
Portfolio as a factor in the selection of broker-dealers to execute the
Portfolio's portfolio transactions.
To the extent consistent with the foregoing, the Portfolio will be
governed in the selection of brokers and dealers, and the negotiation of
brokerage commission rates and dealer spreads, by the reliability and quality
of the services, including primarily the availability and value of research
information and to a lesser extent statistical assistance furnished to the
Adviser of the Portfolio, and their value and expected contribution to the
performance of the Portfolio. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Adviser. The receipt of
research information is not expected to reduce significantly the expenses of
the Adviser. The research information and statistical assistance furnished by
brokers and dealers may benefit the Life Company or other advisory clients of
the Adviser, and conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser may result in research information and
statistical assistance beneficial to the Portfolio. The Portfolio will make no
commitments to allocate portfolio transactions upon any prescribed basis.
While the Portfolio's officers will be primarily responsible for the allocation
of the Portfolio's brokerage business, their policies and practices in this
regard must be consistent with the foregoing and will at all times be subject
to review by the
-23-
<PAGE> 24
Trustees. For the fiscal years ended May 31, 1994, 1993 and 1992, no
negotiated brokerage commissions were paid on portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Portfolio may pay to a broker which provides brokerage and research
services to the Portfolio an amount of disclosed commission in excess of the
commission which another broker would have charged for effecting that
transaction. This practice is subject to a good faith determination by the
Trustees that the price is reasonable in light of the services provided and to
policies that the Trustees may adopt from time to time. During the fiscal year
ended May 31, 1994, the Portfolio did not pay commissions as compensation to
any brokers for research services such as industry, economic and company
reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker Anthony")
John Hancock Distributors, Inc. ("John Hancock Distributors") and Sutro &
Company, Inc. ("Sutro"), are broker-dealers ("Affiliated Brokers"). Pursuant
to procedures determined by the Trustees and consistent with the above policy
of obtaining best net results, the Portfolio may execute portfolio transactions
with or through Tucker Anthony, Sutro or John Hancock Distributors. During the
year ended May 31, 1994, the Portfolio did not execute any portfolio
transactions with then affiliated brokers.
Any of the Affiliated Brokers may act as broker for the Portfolio on
exchange transactions, subject, however, to the general policy of the Portfolio
set forth above and the procedures adopted by the Trustees pursuant to the 1940
Act. Commissions paid to an Affiliated Broker must be at least as favorable as
those which the Trustees believe to be contemporaneously charged by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold. A transaction would not be placed with an Affiliated
Broker if the Portfolio would have to pay a commission rate less favorable than
the Affiliated Broker's contemporaneous charges for comparable transactions for
its other most favored, but unaffiliated, customers, except for accounts for
which the Affiliated Broker acts as a clearing broker for another brokerage
firm, and any customers of the Affiliated Broker not comparable to the
Portfolio as determined by a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of the Portfolio, the Adviser or the
Affiliated Brokers. Because the Adviser, which is affiliated with the
Affiliated Brokers, has, as an investment adviser to the Portfolio, the
obligation to provide investment management services, which includes elements
of research and related investment skills, such research and related skills
will not be used by the Affiliated Brokers as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria. The Portfolio will not effect principal transactions with Affiliated
Brokers. The Portfolio may, however, purchase securities from other members of
underwriting syndicates of which Tucker Anthony, Sutro and John Hancock
Distributors are members, but only in accordance with the policy set forth
above and procedures adopted and reviewed periodically by the Trustees.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Portfolio.
-24-
<PAGE> 25
CUSTODY OF PORTFOLIO
Portfolio securities of the Portfolio are held pursuant to a custodian
agreement between the Trust, on behalf of the Portfolio, and Investors Bank and
Trust ("IBT") 24 Federal Street, Boston, Massachusetts. Under the custodian
agreement, IBT performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116,
has been selected as the independent auditors of the Portfolio. The financial
statements of the Portfolio included in the Prospectus and this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
indicated in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
-25-
<PAGE> 26
FINANCIAL STATEMENTS
F-1
<PAGE> 27
<TABLE>
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST INVESTMENTS
Transamerica Adjustable U.S. Government Trust (the "Fund") invests
substantially all of its assets in an affiliated investment company,
Adjustable U.S. Government Fund (the "Portfolio"). The investments below are
those owned by the Portfolio. The financial statements of the Portfolio have
been audited by Ernst & Young as set forth in their report included elsewhere
herein. The Fund owned more than 99.99% of the Portfolio at March 31, 1994.
March 31, 1994
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY OBLIGATIONS - 90.16%
- ---------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 34.56%
9.500% due 12/01/01 ......................................................... $ 46,447 $ 48,615
11.000% due 01/01/01 ......................................................... 28,401 30,483
13.000% due 01/01/11 ......................................................... 66,362 73,580
ARMs - Adjustable Rate Mortgages
3.567% due 12/01/23 ......................................................... 1,667,208 1,682,318
4.750% due 08/01/17 ......................................................... 25,998 25,925
5.000% due 08/01/17 ......................................................... 558,566 569,039
5.071% due 05/01/17 ......................................................... 15,753 15,911
5.125% with various maturities to 05/01/15 .................................. 349,355 349,891
5.129% due 02/01/19 ......................................................... 39,364 39,020
5.375% with various maturities to 09/01/17 .................................. 1,299,422 1,323,316
5.500% with various maturities to 02/01/18 .................................. 535,413 542,029
5.502% due 01/01/04 ......................................................... 631,692 634,654
5.576% due 10/01/19 ......................................................... 2,800,455 2,881,406
5.587% due 05/01/22 ......................................................... 346,626 344,569
5.625% due 05/01/16 ......................................................... 7,607 7,814
5.632% due 09/01/22 ......................................................... 421,937 425,827
5.650% due 03/01/19 ......................................................... 2,570,851 2,664,045
5.750% due 05/01/17 ......................................................... 92,554 93,856
5.996% due 10/01/18 ......................................................... 512,933 508,686
6.625% due 05/01/17 ......................................................... 55,266 56,924
6.875% due 10/01/18 ......................................................... 60,444 60,482
----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $12,546,281) ............................................................. 12,378,390
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 29.55%
ARMS - ADJUSTABLE RATE MORTGAGES
3.380% due 11/01/23 ......................................................... 2,057,889 2,054,031
3.418% due 11/01/23 ......................................................... 871,508 870,692
3.483% due 11/01/23 ......................................................... 1,061,133 1,065,113
4.936% due 06/01/19 ......................................................... 441,408 439,271
5.000% with various maturities to 06/01/17 .................................. 905,850 928,707
5.125% due 05/01/17 ......................................................... 58,572 58,042
5.250% due 12/01/17 ......................................................... 261,483 262,015
5.390% due 03/01/27 ......................................................... 41,947 42,911
5.530% due 02/01/27 ......................................................... 414,855 426,589
5.625% with various maturities to 07/01/18 .................................. 856,817 859,755
5.628% due 09/01/18 ......................................................... 1,916,050 1,972,933
5.750% due 07/01/18 ......................................................... 232,457 232,930
5.850% with various maturities to 06/01/14 .................................. 172,026 173,374
6.028% due 04/01/19 ......................................................... 117,269 117,270
6.250% due 11/01/13 ......................................................... 186,178 191,473
6.508% due 12/01/17 ......................................................... 334,603 333,244
6.750% due 08/01/18 ......................................................... 220,171 220,963
8.952% due 05/01/17 ......................................................... 317,833 336,506
----------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $10,699,420) ............................................................. 10,585,819
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 19.26%
9.000% due 07/15/01 ......................................................... 22,018 23,428
</TABLE>
4
<PAGE> 28
<TABLE>
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST INVESTMENTS
Continued
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.000% with various maturities to 09/15/17 .................................. 561,372 606,564
10.500% due 06/15/16 ......................................................... 47,464 51,410
11.000% with various maturities to 12/15/15 .................................. 1,336,738 1,511,350
11.500% with various maturities to 03/20/18 .................................. 265,029 298,123
12.000% with various maturities to 08/15/15 .................................. 498,906 566,727
12.500% due 07/15/15 ......................................................... 68,212 73,989
ARMs - Adjustable Rate Mortgages
6.500% due 05/20/23 ......................................................... 2,685,999 2,722,932
6.750% due 03/20/16 ......................................................... 1,047,831 1,045,212
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $7,056,364) .............................................................. 6,899,735
U.S. TREASURY NOTES - 6.79%
4.625% due 02/29/96 ......................................................... 2,000,000 1,981,460
5.375% due 04/30/94 (A) ..................................................... 450,000 450,571
-----------
TOTAL U.S. TREASURY NOTES
(Cost $2,443,838) .............................................................. 2,432,031
-----------
TOTAL U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $32,745,903) ............................................................. 32,295,975
SHORT-TERM OBLIGATIONS - 9.44%
- --------------------------------
REPURCHASE AGREEMENT - 9.44%
Morgan Stanley 3.600% due 04/04/94 (dated 03/31/94). Collateralized by
$3,450,619 value, Federal Home Loan Mortgage Corporation ARM 5.129%
due 03/01/19. (Repurchase proceeds $3,384,353).
(Cost $3,383,338) .............................................................. 3,383,000 3,383,338
-----------
TOTAL INVESTMENTS - 99.60%
(Cost $36,129,241) ............................................................. 35,679,313
CASH AND OTHER ASSETS, LESS LIABILITIES - 0.40% .............................. 141,532
-----------
NET ASSETS, AT VALUE - 100.00% ................................................ $35,820,845(B)
===========
<FN>
(A) Long-term obligations that will mature in less than one year.
(B) Transamerica Adjustable U.S. Government Trust owned 3,622,603
shares of Adjustable U.S. Government Fund valued at $35,827,542 at
March 31, 1994, representing more than 99.99% of the shares outstanding
at that date.
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 29
<TABLE>
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1994
<S> <C> <C>
ASSETS
Investment in 3,622,603 shares of Adjustable U.S.
Government Fund at value (Note A)
(cost $36,285,754) .............................. $35,827,542
Income dividends receivable ....................... 139,437
Deferred organization expenses .................... 26,660
TOTAL ASSETS ...................................... 35,993,639
-----------
LIABILITIES
Payable for dividends ............................. 38,048
Payable to Investment Adviser for:
Distribution expenses ........................... $6,314
Management fees ................................. 3,115
Administrative fees ............................. 2,027 11,456
------
Other accrued expenses ............................ 8,056
-----------
TOTAL LIABILITIES ................................. 57,560
-----------
NET ASSETS, at value, equivalent to $9.89 per
share for 2,458,376 Class A Shares ($.01
par value) outstanding and $9.89 per share
for 1,175,163 Class B Shares ($.01 par value)
outstanding ..................................... $35,936,079
===========
</TABLE>
See Notes to Financial Statements.
6
<PAGE> 30
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
STATEMENT OF OPERATIONS
Year Ended March 31, 1994
<S> <C> <C>
INVESTMENT INCOME
Income dividends from Portfolio ................ $2,001,073
EXPENSES (1)
Distribution expenses (see Note D) ............. $ 93,843
Administrative fees ............................ 64,112
Transfer agent fees ............................ 37,299
Registration fees .............................. 31,727
Shareholder reports ............................ 14,230
Trustees' fees and expenses .................... 10,518
Audit and legal fees ........................... 10,190
Organization costs ............................. 9,691
Miscellaneous .................................. 5,659
Less: Expense reimbursement .................... (68,955) 208,314
-------- ----------
NET INVESTMENT INCOME ........................ 1,792,759
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments ............... (210,326)
Net change in unrealized depreciation of
investments ................................... (453,740)
----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS. (664,066)
----------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS ................................... $1,128,693
==========
<FN>
(1) The Fund, through its ownership of shares of the Adjustable
U.S. Government Fund (the "Portfolio"), also indirectly incurs
the expenses of the Portfolio. Total Portfolio expenses were
$230,383, net of $41,770 in reimbursed expense.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income ................... $ 1,792,759 $ 1,639,251
Net realized loss on investments ........ (210,326) (57,613)
Net change in unrealized depreciation of
investments ............................ (453,740) 10,046
------------ ------------
Increase in net assets resulting from
operations ............................. 1,128,693 1,591,684
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income -
Class A .............................. (1,297,489) (1,216,419)
Class B .............................. (495,495) (419,774)
------------ ------------
Total distributions to shareholders ..... (1,792,984) (1,636,193)
SHARE TRANSACTIONS
Increase (decrease) in shares
outstanding ........................... (10,425,306) 31,664,705
------------ ------------
Increase (decrease) in net assets ....... (11,089,597) 31,620,196
NET ASSETS
Beginning of year ....................... $ 47,025,676 $ 15,405,480
------------ ------------
End of year ............................. $ 35,936,079 $ 47,025,676
============ ============
Undistributed Net Investment Income ..... $ 3,599 $ 3,058
============ ============
</TABLE>
See Notes to Financial Statements.
7
<PAGE> 31
<TABLE>
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST
FINANCIAL HIGHLIGHTS
<CAPTION>
CLASS A CLASS B
------------------------------- ------------------------------
YEAR ENDED YEAR ENDED
MARCH 31, PERIOD ENDED MARCH 31, PERIOD ENDED
------------------ MARCH 31, ------------------ MARCH 31,
1994 1993 1992(1) 1994 1993 1992(1)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share income and capital changes for a share
outstanding during each period:
Net asset value, beginning of period...................... $ 10.05 $ 10.03 $ 10.00 $ 10.05 $ 10.03 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... 0.41 0.58 0.17 0.34 0.51 0.15
Net realized and unrealized gain (loss) on investments.... (0.16) 0.02 0.03 (0.16) 0.02 0.03
------- ------- ------- ------- ------- -------
Total from Investment Operations........................ 0.25 0.60 0.20 0.18 0.53 0.18
LESS DISTRIBUTIONS
Dividends from net investment income...................... (0.41) (0.58) (0.17) (0.34) (0.51) (0.15)
------- ------- ------- ------- ------- -------
Net asset value, end of period............................ $ 9.89 $ 10.05 $ 10.03 $ 9.89 $ 10.05 $ 10.03
======= ======= ======= ======= ======= =======
TOTAL RETURN(2)........................................... 2.51% 6.08% 1.96% 1.85% 5.40% 1.80%
======= ======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net assets(3)................ 0.99% 1.05% 1.62% 1.64% 1.70% 2.27%
Ratio of expense reimbursement to average net assets(3)... (0.24)% (0.55)% (1.12)% (0.24)% (0.55)% (1.12)%
------- ------- ------- ------- ------- -------
Ratio of net expenses to average net assets(3)............ 0.75% 0.50% 0.50% 1.40% 1.15% 1.15%
======= ======= ======= ======= ======= =======
Ratio of net investment income to average net assets(4)... 4.09% 5.47% 6.47%(6) 3.44% 4.82% 5.85%(6)
Portfolio turnover(5) .................................... 244% 186% 1% 244% 186% 1%
Net Assets, end of period (in thousands).................. $24,310 $33,273 $13,775 $11,626 $13,753 $1,630
<FN>
(1) Financial highlights are for the period from December 31, 1991 (date of Fund's initial offering of shares
to the public) to March 31, 1992, and the ratios have been annualized. Total return has not been annualized.
(2) Total return does not include the effect of the initial sales charge for Class A Shares or the contingent
deferred sales charge for Class B Shares.
(3) The expenses used in the ratios represent the total expenses of the Fund plus the expenses of Adjustable U.S.
Government Fund (the "Portfolio") which are incurred indirectly by the Fund through the Fund's investment in
the Portfolio. For the year ended March 31, 1994, the expenses and expense reimbursement to average net assets for
the Fund alone were 0.40% and (0.15)%, respectively for Class A Shares and 1.05% and (0.15)%, respectively for
Class B Shares. For the fiscal year ended March 31, 1993, the expenses and expense reimbursement to average
net assets for the Fund alone were 0.43% and (0.43)%, respectively for Class A Shares and 1.08% and (0.43)%,
respectively for Class B Shares. For the period ended March 31, 1992, the annualized ratios of expenses
and expense reimbursement to average net assets were 0.77% and (0.77)%, respectively for Class A Shares and
1.42% and (0.77)%, respectively for Class B Shares.
(4) The ratio for the Portfolio was 4.29% for the year ended March 31, 1994, 5.53% for the year ended March 31, 1993
and 6.85%, annualized, for the period ended March 31, 1992.
(5) Portfolio turnover presented above represents the turnover of the Portfolio.
(6) The ratio of net investment income to average net assets for this period was computed based on paid shares since
only paid shares are entitled to receive dividends from net investment income.
</TABLE>
See Notes to Financial Statements.
8
<PAGE> 32
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1994
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Transamerica Bond Fund (TBF) is a diversified open-end management investment
company registered under the Investment Company Act of 1940, as amended. Since
November 29, 1984, TBF has operated as a series fund, currently issuing six
series of shares. Transamerica Adjustable U.S. Government Trust (the "Fund"),
a series of TBF, offers two classes of shares to the public. Class A Shares
are subject to an initial sales charge of up to 3.50% and a 12b-1 distribution
plan. Class B Shares are subject to a contingent deferred sales charge and a
separate 12b-1 distribution plan. The Fund invests substantially all of its
assets in Adjustable U.S. Government Fund (the "Portfolio"), another series of
TBF having the same investment objective as the Fund. Because the Fund invests
substantially all of its assets in shares of the Portfolio, certain Portfolio
information, including the Fund's share of Portfolio expenses, is included in
these notes and elsewhere in the financial statements. At March 31, 1994, the
Fund owned more than 99.99% of the shares of the Portfolio. The following is a
summary of significant accounting policies consistently followed by the Fund
and the Portfolio.
(1) At present, the Fund's only investment is shares of the Portfolio
which are valued daily at the net asset value of the Portfolio at the close of
trading on the NYSE. The Portfolio values its investment securities, for which
over-the-counter market quotations are readily available, at the last reported
bid price or at quotations provided by market makers. Investment securities for
which market quotations are not readily available are valued at a fair value as
determined in good faith by TBF's Board of Trustees. Short-term investments are
valued at amortized cost (original cost plus amortized discount or accrued
interest.)
(2) Security transactions are accounted for on the trade date. Realized
gains and losses from security transactions are determined on the basis of
identified cost for both financial reporting and federal income tax purposes.
Portfolio interest income is accrued daily and debt discounts are amortized
using the straight-line method. Fund income dividends, on its investment in the
Portfolio, are accrued daily.
(3) Dividends of the Fund and the Portfolio are declared daily and paid
or reinvested at the applicable net asset value monthly.
Effective April 1, 1993, the Fund adopted Statement of Position 93-2,
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gains, and Return of Capital Distributions by Investment Companies." As
a result of this statement, the Fund changed the classification of
distributions to shareholders to better disclose the differences between
financial statement amounts and distributions determined and reported in
accordance with income tax regulations. Accordingly, the Fund reclassified $766
between undistributed net investment income and additional paid-in capital. Net
investment income, net realized losses, and net assets were not affected by
this change.
(4) No provisions for federal income taxes have been made since the
Fund and the Portfolio intend to distribute all taxable income and profits to
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code.
The Fund and the Portfolio have a December 31 tax year end. For federal
income tax purposes, at December 31, 1993, the Fund had an accumulated net
realized capital loss carry forward of $107,000, which will expire in 2001.
(5) Because the interest rate on adjustable rate securities generally
moves in the same direction as market interest, the market value of these
securities tends to be more stable than long-term fixed rate debt securities.
However, the income earned on these securities will fluctuate to a greater
degree, directly impacting net income and dividends available to shareholders.
(6) On a daily basis, income, unrealized and realized gains and losses,
and expenses which are not class specific are allocated to each class based on
their respective relative net assets. Class specific expenses, such as
distribution expenses, are applied to the class to which they are attributed.
NOTE B - MANAGEMENT AND ADMINISTRATIVE FEES AND
OTHER TRANSACTIONS WITH AFFILIATES
Transamerica Fund Management Company (TFMC) serves as Investment Adviser to the
Portfolio and as Administrator to the Fund. For these services, the Fund pays
TFMC total indirect and direct fees at an annual rate of 0.50% of the Fund's
average daily net assets. Of this amount, 0.40% represents Investment Advisory
fees paid by the Portfolio and indirectly by the Fund through its investment
in the Portfolio. During the year ended March 31, 1994, the Portfolio paid or
accrued $184,072 for these services. The remaining 0.10% is for Administrative
fees paid directly by the Fund, which amounted to $46,091 for the year ended
March 31, 1994.
TFMC has voluntarily agreed to waive fees and assume normal operating
expenses through June 30, 1994, such that the aggregate expenses of the Fund
and the Portfolio do not exceed, on an annual basis, 0.75% and 1.40% of the
average net assets of Class A and Class B Shares, respectively. For the year
ended March 31, 1994, TFMC reimbursed the Fund $68,955 and the Portfolio
$41,770 pursuant to this agreement.
9
<PAGE> 33
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE B (Continued)
In addition, the Fund and the Portfolio reimburse TFMC pursuant to a
separate Accounting Services and Shareholder Services Agreement for actual
expenses incurred in providing certain accounting and bookkeeping services.
During the year ended March 31, 1994, the Fund and the Portfolio paid or
accrued $14,730 and $26,722, respectively, to TFMC for these services.
During the year ended March 31, 1994, Transamerica Fund Distributors,
Inc. (the "Distributor"), an affiliate of TFMC, as principal underwriter,
retained $7,455 as its portion of the commissions charged on sales of Class A
Shares of the Fund.
The Fund and Portfolio paid no compensation directly to any officer.
Certain officers and a trustee of TBF are affiliated with TFMC.
During the year ended March 31, 1994, the Fund and the Porfolio paid
legal fees of $3,218 to Baker & Botts. A partner with Baker & Botts is an
officer of TBF.
NOTE C - COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended March 31, 1994, the Fund purchased and redeemed
Portfolio shares at net asset value aggregating $30,100,940 and $40,490,617,
respectively.
At March 31, 1994, the identified cost of total investments owned is
the same for both financial reporting and federal income tax purposes. At March
31, 1994, the gross unrealized appreciation and gross unrealized depreciation
of investments in the Portfolio, for federal income tax purposes, were $27,262
and $477,190, respectively.
NOTE D - PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized under separate distribution plans to finance activities related
to the distribution of its Class A and Class B Shares (the "Class A Plan" and
the "Class B Plan," respectively). The distribution plans, together with the
initial sales charge on Class A Shares and the contingent deferred sales charge
on Class B Shares, comply with the regulations covering maximum sales charges
assessed by mutual funds distributed through securities dealers that are NASD
members.
The Class A Plan and the Class B Plan permit each class to make
payments to the Distributor up to 0.25% annually of average daily net assets
for certain distribution costs such as service fees paid to dealers, production
and distribution of prospectuses to prospective investors, services provided to
new and existing shareholders and other distribution related activities. During
the year ended March 31, 1994, Class A and Class B made no payments to the
Distributor related to the above activities.
The Class B Plan also permits Class B to reimburse the Distributor up
to 0.65% annually of average daily net assets for costs related to compensation
paid to securities dealers, in place of an initial sales charge to investors,
on the sale of Class B Shares. These costs are based upon a commission payment
charge of 3% of the value of Class B Shares sold (excluding shares acquired
through reinvestment) reduced by the amount of contingent deferred sales
charges (CDSC) that have been received by the Distributor on redemptions of
Class B Shares. These costs also include a charge of interest (carrying charge)
at an annual rate of 1% over the prevailing prime rate to the extent cumulative
commission payment charges, plus any previous carrying charges, less CDSC
received by the Distributor, have not been paid in full by the Fund. For the
year ended March 31, 1994, Class B reimbursed the Distributor $93,843 or 0.65%
for such costs. For the year ended March 31, 1994, the Distributor received
$53,744 in CDSC. At March 31, 1994, the balance of unrecovered costs was
$349,445.
NOTE E - ORGANIZATION
TBF was organized as a multi-series Massachussetts business trust on
November 29, 1984. The Fund and the Portfolio, series of TBF, were authorized
by the Board of Trustees on October 22, 1991. Each series of TBF has an
unlimited number of shares authorized. The Fund and the Portfolio commenced
operations on December 31, 1991.
The organization expenses of the Fund and the Portfolio have been
deferred and are being amortized over a period during which it is expected that
a benefit will be realized, but not longer than five years from the date of
commencement of operations.
10
<PAGE> 34
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST
NOTES TO FINANCIAL STATEMENTS
Continued
<TABLE>
NOTE F - SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1994 1993
------------------------- -------------------------
SHARES DOLLARS SHARES DOLLARS
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold - Class A ........................................ 2,545,099 $ 25,521,547 4,427,751 $ 44,653,294
Shares sold - Class B ........................................ 604,333 6,069,244 1,335,818 13,481,714
Shares issued in reinvestment of distributions - Class A ..... 91,861 920,605 80,749 813,913
Shares issued in reinvestment of distributions - Class B ..... 32,414 324,874 27,564 277,643
Shares redeemed - Class A .................................... (3,489,129) (34,952,816) (2,571,363) (25,974,711)
Shares redeemed - Class B .................................... (829,920) (8,308,760) (157,623) (1,587,148)
---------- ------------ ---------- ------------
Net increase (decrease) in shares outstanding ................ (1,045,342) $(10,425,306) 3,142,896 $ 31,664,705
========== ============ ========== ============
<FN>
The components of net assets at March 31, 1994, are as follows:
Capital paid-in ........................................................................................ $ 36,657,968
Undistributed net investment income .................................................................... 3,599
Accumulated net realized loss on investments ........................................................... (267,276)
Net unrealized depreciation of investments ............................................................. (458,212)
------------
NET ASSETS ............................................................................................. $ 35,936,079
============
</TABLE>
11
<PAGE> 35
TRANSAMERICA ADJUSTABLE U.S. GOVERNMENT TRUST
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
Transamerica Adjustable U.S. Government Trust,
a series of Transamerica Bond Fund
We have audited the accompanying statement of assets and liabilities of
Transamerica Adjustable U.S. Government Trust, a series of Transamerica Bond
Fund, as of March 31, 1994, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1994, by correspondence with the transfer agent. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Transamerica Adjustable U.S. Government Trust, a series of
Transamerica Bond Fund, at March 31, 1994, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG
Houston, Texas
April 29, 1994
12
<PAGE> 36
<TABLE>
ADJUSTABLE U.S. GOVERNMENT FUND
SCHEDULE OF INVESTMENTS
<CAPTION>
March 31, 1994
FACE
ISSUER AMOUNT VALUE
- --------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND
- -------------------
U.S. GOVERNMENT AGENCY
- ----------------------
OBLIGATIONS - 90.16%
- ----------------------
FEDERAL HOME
LOAN MORTGAGE
CORPORATION - 34.56%
9.500% due 12/01/01 $ 46,447 $ 48,615
11.000% due 01/01/01 28,401 30,483
13.000% due 01/01/11 66,362 73,580
ARMs - Adjustable Rate
Mortgages
3.567% due 12/01/23 1,667,208 1,682,318
4.750% due 08/01/17 25,998 25,925
5.000% due 08/01/17 558,566 569,039
5.071% due 05/01/17 15,753 15,911
5.125% with various
maturities to 05/01/15 349,355 349,891
5.129% due 02/01/19 39,364 39,020
5.375% with various
maturities to 09/01/17 1,299,422 1,323,316
5.500% with various
maturities to 02/01/18 535,413 542,029
5.502% due 01/01/04 631,692 634,654
5.576% due 10/01/19 2,800,455 2,881,406
5.587% due 05/01/22 346,626 344,569
5.625% due 05/01/16 7,607 7,814
5.632% due 09/01/22 421,937 425,827
5.650% due 03/01/19 2,570,851 2,664,045
5.750% due 05/01/17 92,554 93,856
5.996% due 10/01/18 512,933 508,686
6.625% due 05/01/17 55,266 56,924
6.875% due 10/01/18 60,444 60,482
----------
TOTAL FEDERAL HOME
LOAN MORTGAGE CORPORATION
(Cost $12,546,281) 12,378,390
FEDERAL NATIONAL MORTGAGE
ASSOCIATION - 29.55%
ARMs - Adjustable Rate
Mortgages
3.380% due 11/01/23 2,057,889 2,054,031
3.418% due 11/01/23 871,508 870,692
3.483% due 11/01/23 1,061,133 1,065,113
4.936% due 06/01/19 441,408 439,271
5.000% with various
maturities to 06/01/17 905,850 928,707
5.125% due 05/01/17 58,572 58,042
5.250% due 12/01/17 261,483 262,015
5.390% due 03/01/27 41,947 42,911
5.530% due 02/01/27 414,855 426,589
5.625% with various
maturities to 07/01/18 856,817 859,755
5.628% due 09/01/18 1,916,050 1,972,933
5.750% due 07/01/18 232,457 232,930
5.850% with various
maturities to 06/01/14 172,026 173,374
6.028% due 04/01/19 117,269 117,270
6.250% due 11/01/13 186,178 191,473
6.508% due 12/01/17 334,603 333,244
6.750% due 08/01/18 220,171 220,963
8.952% due 05/01/17 317,833 336,506
----------
TOTAL FEDERAL NATIONAL
MORTGAGE ASSOCIATION
(Cost $10,699,420) 10,585,819
</TABLE>
13
<PAGE> 37
<TABLE>
ADJUSTABLE U.S. GOVERNMENT FUND
SCHEDULE OF INVESTMENTS
Continued
<CAPTION>
March 31, 1994
FACE
ISSUER AMOUNT VALUE
- --------------------------------------------------------
<S> <C> <C>
GOVERNMENT
NATIONAL MORTGAGE
ASSOCIATION - 19.26%
9.000% due 07/15/01 $ 22,018 $ 23,428
10.000% with various
maturities to 09/15/17 561,372 606,564
10.500% due 06/15/16 47,464 51,410
11.000% with various
maturities to 12/15/15 1,336,738 1,511,350
11.500% with various
maturities to 03/20/18 265,029 298,123
12.000% with various
maturities to 08/15/15 498,906 566,727
12.500% due 07/15/15 68,212 73,989
ARMs - Adjustable Rate
Mortgages
6.500% due 05/20/23 2,685,999 2,722,932
6.750% due 03/20/16 1,047,831 1,045,212
-----------
TOTAL GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION
(Cost $7,056,364) 6,899,735
U.S. TREASURY NOTES - 6.79%
4.625% due 02/29/96 2,000,000 1,981,460
5.375% due 04/30/94 (A) 450,000 450,571
-----------
TOTAL U.S. TREASURY NOTES
(Cost $2,443,838) 2,432,031
-----------
TOTAL U.S. GOVERNMENT AND
U.S. GOVERNMENT AGENCY
OBLIGATIONS
(Cost $32,745,903) 32,295,975
SHORT-TERM
- ----------
OBLIGATIONS - 9.44%
- ---------------------
REPURCHASE
AGREEMENT - 9.44%
Morgan Stanley 3.600% due
04/04/94 (dated 03/31/94).
Collateralized by
$3,450,619 value, Federal
Home Loan Mortgage
Corporation ARM 5.129%
due 03/01/19. (Repurchase
proceeds $3,384,353).
(Cost $3,383,338) 3,383,000 3,383,338
-----------
TOTAL INVESTMENTS - 99.60%
(Cost $36,129,241) 35,679,313
CASH AND OTHER ASSETS,
LESS LIABILITIES - 0.40% 141,532
-----------
NET ASSETS, at value,
equivalent to $9.89 per
share for 3,622,614 shares
($.01 par value)
outstanding - 100.00% $35,820,845
===========
<FN>
(A) Long-term obligations that will mature in less than one year.
</TABLE>
See Notes to Financial Statements.
14
<PAGE> 38
ADJUSTABLE U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
STATEMENT OF OPERATIONS
Year Ended March 31, 1994
<S> <C> <C>
INVESTMENT INCOME
Interest $2,203,843
EXPENSES
Management fees $ 184,072
Accounting service fees 38,012
Custodian fees 25,598
Audit and legal fees 9,882
Shareholder reports 5,045
Registration fees 4,041
Organization costs 3,348
Miscellaneous 2,155
Less: Expense reimbursement (41,770) 230,383
--------- ----------
NET INVESTMENT INCOME 1,973,460
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS
Net realized loss on investments (143,030)
Net change in unrealized
depreciation of investments (492,360)
----------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS (635,390)
INCREASE IN NET ASSETS RESULTING ----------
FROM OPERATIONS $1,338,070
==========
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Year Ended March 31,
---------------------------
1994 1993
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income $ 1,973,460 $ 1,709,069
Net realized loss on
investments (143,030) (127,631)
Net change in unrealized
appreciation
(depreciation) of
investments (492,360) 55,035
----------- -----------
Increase in net assets
resulting from
operations 1,338,070 1,636,473
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment
income (1,997,044) (1,697,210)
In excess of net investment income (4,028) -
----------- -----------
Total distributions to shareholders (2,001,072) (1,697,210)
SHARE TRANSACTIONS
Increase (decrease) in
shares outstanding (10,389,677) 31,586,268
----------- -----------
Increase (decrease) in net assets (11,052,679) 31,525,531
NET ASSETS
Beginning of year 46,873,524 15,347,993
----------- -----------
End of year $35,820,845 $46,873,524
=========== ===========
Undistributed Net Investment Income $ 0 $ 16,053
=========== ===========
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 39
<TABLE>
ADJUSTABLE U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1994
<S> <C> <C>
ASSETS
Investments at value (cost $36,129,241) $35,679,313
Receivable for:
Investments sold $ 5,119,896
Interest 222,657
Paydowns 95,502 5,438,055
-----------
Deferred organization expenses 9,208
-----------
Total Assets 41,126,576
LIABILITIES
Payable for:
Investments purchased 5,130,052
Dividends 139,427 5,269,479
-----------
Payable to Investment Adviser for:
Management fees 7,961
Accounting service fees 2,218 10,179
-----------
Other accrued expenses 19,070
Other liabilities 7,003
-----------
Total Liabilities 5,305,731
-----------
NET ASSETS, at value, equivalent to $9.89 per share for 3,622,614 shares
($.01 par value) outstanding $35,820,845
===========
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 40
<PAGE>
<TABLE>
ADJUSTABLE U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
<CAPTION>
Year Ended March 31, Period Ended
------------------------- March 31,
1994 1993 1992 (1)
----------- ---------- -----------
<S> <C> <C> <C>
Per share income and capital changes for a share outstanding during each period:
Net asset value, beginning of period 10.05 10.03 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.43 0.58 0.17
Net realized and unrealized gain (loss) on investments (0.15) 0.02 0.03
------- ------- -------
Total from Investment Operations 0.28 0.60 0.20
LESS DISTRIBUTIONS
Dividends from net investment income (0.44) (0.58) (0.17)
------- ------- -------
Net asset value, end of period 9.89 10.05 10.03
======= ======= =======
TOTAL RETURN 2.77% 6.08% 1.96%
======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.59% 0.62% 0.85%
Ratio of expense reimbursement to average net assets (0.09)% (0.12)% (0.35)%
------- ------- -------
Ratio of net expenses to average net assets 0.50% 0.50% 0.50%
======= ======= =======
Ratio of net investment income to average net assets 4.29% 5.53% 6.85% (2)
Portfolio turnover 244% 186% 1%
Net Assets, end of period (in thousands) $35,821 $46,874 $15,348
<FN>
(1) Financial highlights are for the period from December 31, 1991 (date of Portfolio's initial offering of shares to the public)
to March 31, 1992, and the ratios have been annualized. Total return has not been annualized.
(2) The ratio of net investment income to average net assets for this period was computed based on paid shares since only paid
shares are entitled to receive dividends from net investment income.
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 41
ADJUSTABLE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1994
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Transamerica Bond Fund (TBF) is a diversified open-end management investment
company registered under the Investment Company Act of 1940, as amended. Since
November 29, 1984, TBF has operated as a series fund, currently issuing six
series of shares. Adjustable U.S. Government Fund (the "Portfolio") and
Transamerica Adjustable U.S. Government Trust (the "Fund") are both series of
TBF. Substantially all of the shares issued by the Portfolio are held by the
Fund. The following is a summary of significant accounting policies
consistently followed by the Portfolio.
(1) Securities for which over-the-counter market quotations are readily
available are valued at the last reported bid price or at quotations provided
by market makers. Securities for which market quotations are not readily
available are valued at a fair value as determined in good faith by TBF's Board
of Trustees. Short-term investments are valued at amortized cost (original cost
plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date. Interest
income on investments is accrued daily. For financial reporting purposes, debt
discounts are amortized using the straight-line method. Realized gains and
losses from security transactions are determined on the basis of identified
cost for both financial reporting and federal income tax purposes.
(3) The Fund may invest in repurchase agreements which are
collateralized by underlying debt securities. The Fund will make payment for
such securities only upon physical delivery or evidence of book entry transfer
to the account of the custodian bank. The seller is required to maintain the
value of the underlying security at not less than the repurchase proceeds due
the Fund.
(4) Dividends of the Portfolio are computed daily and reinvested in
Portfolio shares or paid to shareholders monthly.
Effective April 1, 1993, the Fund adopted Statement of Position 93-2,
"Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gains, and Return of Capital Distributions by Investment Companies."
As a result of this statement, the Fund changed the classification of
distributions to shareholders to better disclose the difference between
financial statement amounts and distributions determined and reported in
accordance with income tax regulations. Accordingly, the Fund reclassified
$7,531 between undistributed net investment income and additional paid-in
capital. Net investment income, net realized losses, and net assets were not
affected by this change.
(5) No provision for federal income taxes has been made since it is the
Portfolio's intention to distribute all of its taxable income and profits to
its shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code.
The Portfolio's tax year end is December 31. For federal income tax
purposes, at December 31, 1993, the Portfolio had an accumulated net realized
capital loss carryforward of approximately $79,000. The loss carryforward will
expire as follows: $56,000 - 2000 and $23,000 - 2001.
(6) The Portfolio reports custodian fees net of credits and charges
resulting from cash positions in the custodial accounts greater than or less
than the amounts required to settle portfolio transactions. For the year ended
March 31, 1994, these amounts were $4,086 and $1,868, respectively.
(7) With respect to U.S. government and U.S. government agency
securities in which the Portfolio may invest, only U.S. Treasury and Government
National Mortgage Association (GNMA) issues are backed by the full faith and
credit of the U.S. government. All other government issues are backed by the
issuing agencies and their general ability to borrow from the U.S. government.
(8) Because the interest rate on adjustable rate securities generally
moves in the same direction as market interest, the market value of these
securities tends to be more stable than long-term fixed rate debt securities.
However, the income earned on these securities will fluctuate to a greater
degree, directly impacting net income and dividends available to shareholders.
NOTE B - MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Portfolio's management fee is payable monthly to Transamerica Fund
Management Company (TFMC). The management fee is calculated monthly at an
annual rate of 0.40% on the average daily net assets of the Portfolio.
TFMC voluntarily agreed to reimburse the Portfolio for all normal
operating expenses in excess of 0.50%, on an annual basis, of the Portfolio's
average daily net assets, through June 30, 1994. For the year ended March 31,
1994, TFMC reimbursed the Portfolio $41,770 pursuant to this agreement.
TFMC also provides certain accounting and bookkeeping services to the
Portfolio pursuant to an accounting services agreement. During the year ended
March 31, 1994, the Portfolio paid or accrued $26,722 to TFMC for these
services.
18
<PAGE> 42
ADJUSTABLE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE B (Continued)
The Portfolio paid no compensation directly to any officer. Certain
officers and a trustee of TBF are affiliated with TFMC.
During the year ended March 31, 1994, the Portfolio paid legal fees of
$1,609 to Baker & Botts. A partner with Baker & Botts is an officer of TBF.
NOTE C - COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended March 31, 1994, purchases and sales of
securities, other than short-term obligations, aggregated $105,996,970 and
$115,956,092, respectively.
At March 31, 1994, the identified cost of total investments owned is
the same for both financial reporting and federal income tax purposes. At March
31, 1994, the gross unrealized appreciation and gross unrealized depreciation
of investments for federal income tax purposes were $27,262 and $477,190,
respectively.
NOTE D - ORGANIZATION
TBF was organized as a multi-series Massachussetts business trust on
November 29, 1984. The Portfolio, a series of TBF, was authorized by the Board
of Trustees on October 22, 1991. Each series of TBF has an unlimited number of
shares authorized. The Portfolio commenced operations on December 31, 1991.
The organization expenses of the Portfolio have been deferred and are
being amortized over a period during which it is expected that a benefit will
be realized, but not longer than five years from the date of commencement of
operations.
<TABLE>
NOTE E - SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<CAPTION>
Year Ended March 31,
------------------------------------------------------------
1994 1993
--------------------------- ---------------------------
Shares Dollars Shares Dollars
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold 3,000,982 $ 30,100,940 5,421,630 54,683,497
Shares redeemed (4,043,184) (40,490,617) (2,286,458) (23,097,229)
---------- ------------ ---------- -----------
Net increase (decrease) in shares outstanding (1,042,202) $(10,389,677) 3,135,172 $31,586,268
========== ============ ========== ===========
The components of net assets at March 31, 1994, are as follows:
Capital paid-in 36,541,584
Accumulated net realized loss on investments (270,811)
Net unrealized depreciation of investments (449,928)
-----------
NET ASSETS $35,820,845
===========
</TABLE>
19
<PAGE> 43
ADJUSTABLE U.S. GOVERNMENT FUND
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
Adjustable U.S. Government Fund,
a series of Transamerica Bond Fund
We have audited the accompanying statement of assets and liabilities of
Adjustable U.S. Government Fund, a series of Transamerica Bond Fund, including
the schedule of investments, as of March 31, 1994, and the related statement of
operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Adjustable U.S. Government Fund, a series of Transamerica Bond
Fund, at March 31, 1994, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then
ended,and the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG
Houston, Texas
April 29, 1994
20
<PAGE> 44
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
Adjustable U.S. Government Fund,
a series of John Hancock Bond Fund
We have audited the accompanying statement of assets and liabilities of
Adjustable U.S. Government Fund, a series of John Hancock Bond Fund, formerly
Transamerica Bond Fund, including the schedule of investments, as of March 31,
1994, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of March 31, 1994, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Adjustable U.S. Government Fund, a series of John Hancock Bond Fund, at March
31, 1994, the results of its operations for the year then ended, and the
financial highlights for each of the indicated periods, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
<PAGE> 45
ADJUSTABLE U.S. GOVERNMENT FUND
SCHEDULE OF INVESTMENTS
UNAUDITED
September 30, 1994
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCY
- ----------------------
OBLIGATIONS-88.77%
- ------------------
FEDERAL HOME
LOAN MORTGAGE
CORPORATION-35.51%
9.500% due 12/01/01............... $ 36,478 $ 37,641
11.000% due 01/01/01............... 17,425 18,563
13.000% due 01/01/11............... 47,414 51,563
ARMs-Adjustable Rate
Mortgages
4.875% due 10/01/18............... 163,700 159,863
4.979% due 05/01/17............... 13,626 13,490
5.054% due 02/01/19............... 34,882 33,912
5.375% due 03/01/15............... 39,483 38,546
5.500% due 02/01/18............... 256,197 254,916
5.625% due 05/01/16............... 7,035 7,095
5.672% due 01/01/04............... 596,820 594,582
5.677% due 11/01/22............... 2,452,325 2,463,821
5.756% due 10/01/18............... 334,820 326,032
5.951% due 03/01/19............... 2,336,160 2,396,025
6.250% due 05/01/17............... 541,739 535,306
6.274% due 10/01/19............... 2,580,460 2,596,992
6.375% due 05/01/17............... 54,723 55,134
6.625% due 05/01/17............... 90,693 90,410
6.750% due 08/01/17............... 23,664 23,162
6.875% due 10/01/18............... 60,035 58,985
7.000% due 08/01/17............... 511,564 508,048
----------
TOTAL FEDERAL HOME LOAN
MORTGAGE CORPORATION
(Cost $10,562,481)................. 10,264,086
FEDERAL NATIONAL MORTGAGE
ASSOCIATION-45.79%
ARMs-Adjustable Rate
Mortgages
4.710% due 06/01/19............... 311,770 303,538
4.875% due 12/01/17............... 246,377 241,566
5.350% due 03/01/27............... 41,767 41,735
5.500% due 07/01/18............... 230,509 226,727
5.536% due 02/01/27............... 411,041 412,904
5.625% due 04/01/16............... 582,549 567,804
5.850% with various
maturities to 06/01/14........... 169,334 166,092
5.898% due 04/01/19............... 82,459 82,459
5.928% due 04/01/23............... 5,010,584 5,061,474
6.000% due 05/01/17............... 56,295 54,835
6.250% due 11/01/13............... 153,518 155,005
6.646% due 09/01/18............... 1,742,797 1,763,493
7.000% due 07/01/16............... 47,115 46,453
7.125% due 08/01/18............... 218,576 214,170
7.438% due 07/01/22............... 3,543,321 3,607,544
8.701% due 05/01/17............... 278,587 291,995
----------
TOTAL FEDERAL NATIONAL
MORTGAGE ASSOCIATION
(Cost $13,484,721)................. 13,237,794
GOVERNMENT
NATIONAL MORTGAGE
ASSOCIATION-7.47%
7.000% due 10/20/24............... 416,349 415,959
9.000% due 07/15/01............... 19,091 19,860
10.000% with various
maturities to 06/15/19........... 445,208 475,287
10.500% due 06/15/16............... 47,111 50,498
11.500% with various
maturities to 03/20/18........... 670,255 742,519
12.000% with various
maturities to 07/15/15........... 339,450 381,776
12.500% due 07/15/15............... 67,547 72,571
----------
TOTAL GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION
(Cost $2,184,380).................. 2,158,470
----------
TOTAL U.S. GOVERNMENT
AGENCY OBLIGATIONS
(Cost $26,231,582)................. 25,660,350
</TABLE>
12
<PAGE> 46
ADJUSTABLE U.S. GOVERNMENT FUND
SCHEDULE OF INVESTMENTS
UNAUDITED
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------------------------------------------------------------
<S> <C> <C>
SHORT-TERM
- ----------
OBLIGATIONS-9.88%
- -----------------
REPURCHASE
- ----------
AGREEMENT-9.88%
- ---------------
Kidder Peabody 4.920% due
10/03/94 (dated 09/30/94).
Collateralized by
$2,914,140 value, Federal
National Mortgage
Corporation 8.500% due
09/01/23. (Repurchase
proceeds $2,858,171).
(Cost $2,857,390).................. 2,857,000 2,857,390
-----------
TOTAL INVESTMENTS-98.65%
(Cost $29,088,972)................. 28,517,740
CASH AND OTHER ASSETS,
LESS LIABILITIES-1.35%............. 389,356
-----------
NET ASSETS, at value,
equivalent to $9.73 per
share for 2,969,407
shares ($.01 par value)
outstanding-100.00%.............. $28,907,096
===========
</TABLE>
See Notes to Financial Statements.
13
<PAGE> 47
ADJUSTABLE U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
UNAUDITED
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (cost $29,088,972).............................. $28,517,740
Receivable for:
Investments sold................................................... $5,401,029
Interest........................................................... 179,575 5,580,604
----------
Deferred organization expenses....................................... 7,534
-----------
Total Assets....................................................... 34,105,878
LIABILITIES
Payable for:
Investments purchased.............................................. 5,061,024
Dividends.......................................................... 111,945 5,172,969
---------- ----------
Payable to Investment Adviser for:
Management fees.................................................... 6,151
Accounting service fees............................................ 2,212 8,363
----------
Other accrued expenses............................................... 11,061
Other liabilities.................................................... 6,389
-----------
Total Liabilities.................................................. 5,198,782
-----------
NET ASSETS, at value, equivalent to $9.73 per share for
2,969,407 shares ($.01 par value) outstanding...................... $28,907,096
===========
</TABLE>
See Notes to Financial Statements.
14
<PAGE> 48
ADJUSTABLE U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
UNAUDITED
STATEMENT OF OPERATIONS
Six Months Ended September 30, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest........................... $ 793,265
EXPENSES
Management fees.................... $ 63,193
Accounting service fees............ 18,331
Custodian fees..................... 15,688
Audit and legal fees............... 8,852
Shareholder reports................ 2,169
Organization costs................. 1,674
Miscellaneous...................... 1,741
Less: Expense reimbursement........ (32,567) 79,081
--------- ---------
NET INVESTMENT INCOME............ 714,184
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized loss on investments... (391,427)
Net change in unrealized
depreciation of investments...... (121,304)
---------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS................... (512,731)
---------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS.................. $ 201,453
=========
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, MARCH 31,
1994 1994
------------- -----------
<S> <C> <C>
OPERATIONS
Net investment income.............. $ 714,184 $ 1,973,460
Net realized loss on
investments...................... (391,427) (143,030)
Net change in unrealized
depreciation of
investments...................... (121,304) (492,360)
----------- ------------
Increase in net assets
resulting from
operations....................... 201,453 1,338,070
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment
income........................... (700,540) (1,997,044)
In excess of net investment
income........................... - (4,028)
----------- ------------
Total distributions to
shareholders..................... (700,540) (2,001,072)
SHARE TRANSACTIONS
Decrease in shares
outstanding...................... (6,414,662) (10,389,677)
----------- ------------
Decrease in net assets............. (6,913,749) (11,052,679)
NET ASSETS
Beginning of period................ 35,820,845 46,873,524
----------- ------------
End of period...................... $28,907,096 $ 35,820,845
=========== ============
Undistributed Net
Investment Income................ $ 9,616 $ 0
=========== ============
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 49
ADJUSTABLE U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED YEAR ENDED MARCH 31, ENDED
SEPTEMBER 30, -------------------- MARCH 31,
1994(1) 1994 1993 1992(2)
------------ -------- -------- ---------
<S> <C> <C> <C> <C>
Per share income and capital changes for a share
outstanding during each period:
Net asset value, beginning of period.................... $ 9.89 $ 10.05 $ 10.03 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................... 0.22 0.43 0.58 0.17
Net realized and unrealized gain (loss) on
investments........................................... (0.16) (0.15) 0.02 0.03
------- ------- ------- --------
Total from Investment Operations...................... 0.06 0.28 0.60 0.20
LESS DISTRIBUTIONS
Dividends from net investment income.................... (0.22) (0.44) (0.58) (0.17)
-------- -------- -------- --------
Net asset value, end of period.......................... $ 9.73 $ 9.89 $ 10.05 $ 10.03
======== ======== ======== ========
TOTAL RETURN............................................ 0.69% 2.77% 6.08% 1.96%
======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net assets................. 0.35% 0.59% 0.62% 0.85%
Ratio of expense reimbursement to average net assets.... (0.10)% (0.09)% (0.12)% (0.35)%
-------- -------- -------- --------
Ratio of net expenses to average net assets............. 0.25% 0.50% 0.50% 0.50%
======== ======== ======== ========
Ratio of net investment income to average net assets.... 2.27% 4.29% 5.53% 6.85%(3)
Portfolio turnover...................................... 167% 244% 186% 1%
Net Assets, end of Period (in thousands)................ $ 28,907 $ 35,821 $ 46,874 $ 15,348
<FN>
( 1 ) Financial highlights, including total return, have not been annualized.
( 2 ) Financial highlights are for the period from December 31, 1991 (date of
Portfolio's initial offering of shares to the public) to March 31, 1992,
and the ratios have been annualized. Total return has not been
annualized.
( 3 ) The ratio of net investment income to average net assets for this period
was computed based on paid shares since only paid shares are entitled to
receive dividends from net investment income.
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 50
ADJUSTABLE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1994
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Transamerica Bond Fund (TBF) is a diversified open-end management
investment company registered under the Investment Company Act of 1940, as
amended. Since November 29, 1984, TBF has operated as a series fund, currently
issuing six series of shares. Adjustable U.S. Government Fund (the
``Portfolio'') and Transamerica Adjustable U.S. Government Trust (the ``Fund'')
are both series of TBF. Substantially all of the shares issued by the Portfolio
are held by the Fund. The following is a summary of significant accounting
policies consistently followed by the Portfolio.
(1) Securities for which over-the-counter market quotations are readily
available are valued at the last reported bid price or at quotations provided by
market makers. Securities for which market quotations are not readily available
are valued at a fair value as determined in good faith by TBF's Board of
Trustees. Short-term investments are valued at amortized cost (original cost
plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date. Interest
income on investments is accrued daily. For financial reporting purposes, debt
discounts are amortized using the straight-line method. Realized gains and
losses from security transactions are determined on the basis of identified cost
for both financial reporting and federal income tax purposes.
(3) The Fund may invest in repurchase agreements which are collateralized
by underlying debt securities. The Fund will make payment for such securities
only upon physical delivery or evidence of book entry transfer to the account of
the custodian bank. The seller is required to maintain the value of the
underlying security at not less than the repurchase proceeds due the Fund.
(4) Dividends of the Portfolio are computed daily and reinvested in
Portfolio shares or paid to shareholders monthly. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
(5) No provision for federal income taxes has been made since it is the
Portfolio's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the
Internal Revenue Code.
The Portfolio's tax year end is December 31. For federal income tax purposes, at
December 31, 1993, the Portfolio had an accumulated net realized capital loss
carryforward of approximately $79,000. The loss carryforward will expire as
follows: $56,000 - 2000 and $23,000 - 2001.
(6) The Portfolio reports custodian fees net of credits and charges
resulting from cash positions in the custodial accounts greater than or less
than the amounts required to settle portfolio transactions. For the six months
ended September 30, 1994, these amounts were $3,362 and $7,982, respectively.
(7) With respect to U.S. government and U.S. government agency securities
in which the Portfolio may invest, only U.S. Treasury and Government National
Mortgage Association (GNMA) issues are backed by the full faith and credit of
the U.S. government. All other government issues are backed by the issuing
agencies and their general ability to borrow from the U.S. government.
(8) Because the interest rate on adjustable rate securities generally moves
in the same direction as market interest, the market value of these securities
tends to be more stable than long-term fixed rate debt securities. However, the
income earned on these securities will fluctuate to a greater degree, directly
impacting net income and dividends available to shareholders.
NOTE B-MANAGEMENT FEE AND OTHER
TRANSACTIONS WITH AFFILIATES
The Portfolio's management fee is payable monthly to Transamerica Fund
Management Company (TFMC). The management fee is calculated monthly at an annual
rate of 0.40 of 1% on the average daily net assets of the Portfolio.
TFMC voluntarily agreed to reimburse the Portfolio for all normal operating
expenses in excess of 0.50%, on an annual basis, of the Portfolio's average
daily net assets, through March 31, 1995. For the six months ended Sep- tember
30, 1994, TFMC reimbursed the Portfolio $32,567 pursuant to this agreement.
TFMC also provides certain accounting and bookkeeping services to the
Portfolio pursuant to an accounting services agreement. During the six months
ended September 30, 1994, the Portfolio paid or accrued $13,283 to TFMC for
these services.
The Portfolio paid no compensation directly to any officer. Certain
officers and a trustee of TBF are affiliated with TFMC.
During the six months ended September 30, 1994, the Portfolio paid legal
fees of $631 to Baker & Botts. A partner with Baker & Botts is an officer of
TBF.
17
<PAGE> 51
ADJUSTABLE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
Continued
NOTE C-COST, PURCHASES AND SALES OF
INVESTMENT SECURITIES
During the six months ended September 30, 1994, purchases and sales of
securities, other than short-term obligations, aggregated $49,680,309 and
$55,812,431, respectively.
At September 30, 1994, the identified cost of total investments owned is
the same for both financial reporting and federal income tax purposes. At
September 30, 1994, the gross unrealized appreciation and gross unrealized
depreciation of investments for federal income tax purposes were $2,250 and
$573,482, respectively.
NOTE D-ORGANIZATION
TBF was organized as a multi-series Massachussetts business trust on
November 29, 1984. The Portfolio, a series of TBF, was authorized by the Board
of Trustees on October 22, 1991. Each series of TBF has an unlimited number of
shares authorized. The Portfolio commenced operations on December 31, 1991.
The organization expenses of the Portfolio have been deferred and are
being amortized over a period during which it is expected that a benefit will be
realized, but not longer than five years from the date of commencement of
operations.
NOTE E-SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1994 MARCH 31, 1994
---------------------- ---------------------
SHARES DOLLARS SHARES DOLLARS
------- -------- ------- --------
<S> <C> <C> <C> <C>
Shares sold......................................... 435,266 $ 4,282,819 3,000,982 $ 30,100,940
Shares redeemed..................................... (1,088,473) (10,697,481) (4,043,184) (40,490,617)
---------- ----------- ---------- -----------
Net decrease in shares outstanding.................. (653,207) $(6,414,662) (1,042,202) $(10,389,677)
========== =========== ========== ============
</TABLE>
The components of net assets at September 30, 1994,
are as follows:
<TABLE>
<S> <C>
Capital paid-in................................................................................ $ 30,130,950
Undistributed net investment income............................................................ 9,616
Accumulated net realized loss on investments................................................... (662,238)
Net unrealized depreciation of investments..................................................... (571,232)
------------
NET ASSETS..................................................................................... $ 28,907,096
============
</TABLE>
18
<PAGE> 52
JOHN HANCOCK U.S. GOVERNMENT TRUST
JOHN HANCOCK INTERMEDIATE GOVERNMENT TRUST
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
MAY 15, 1995
This Statement of Additional Information ("SAI") provides
information about John Hancock U.S. Government Trust ("U.S. Government
Fund") and John Hancock Intermediate Government Trust ("Intermediate
Government Fund"; each of U.S. Government Fund and Intermediate
Government Fund, a "Fund" and collectively, the "Funds"), each a
series of John Hancock Bond Fund (the "Trust"), in addition to the
information that is contained in the Funds' Prospectuses, each dated
May 15, 1995.
This SAI is not a prospectus. It should be read in conjunction
with each Fund's Prospectus, copies of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Cross- Cross-
Referenced Referenced to
Statement of to U.S. Gov- Intermediate
Additional ernment Fund Government
Information Prospectus Fund Prospectus
Page Page Page
----------- ----------- ---------------
<S> <C> <C> <C>
Organization of the Trust............... 2 8 7
Investment Objectives and Policies...... 2 4 4
Certain Investment Practices............ 3 4 4
Investment Restrictions................. 10 4 4
Those Responsible for Management........ 12 8 7
Investment Advisory and Other Services . 20 8 7
Distribution Contracts.................. 23 9 8
Net Asset Value......................... 25 15 14
Initial Sales Charge on Class A Shares.. 26 9 8
Deferred Sales Charge on Class B Shares. 27 9 8
Special Redemptions..................... 27 9 8
Additional Services and Programs........ 28 22 22
Description of the Trust's Shares....... 29 8 7
Tax Status.............................. 31 11 11
Calculation of Performance.............. 33 12 12
Brokerage Allocation.................... 37 N/A N/A
Transfer Agent Services................. 39 Back Cover Back Cover
Custody of Portfolio.................... 39 Back Cover Back Cover
Independent Auditors.................... 40 Back Cover Back Cover
Financial Statements.................... F-1 3 3
</TABLE>
<PAGE> 53
ORGANIZATION OF THE TRUST
The Trust is an open-end management investment company organized
as a Massachusetts business trust under a Declaration of Trust dated
December 12, 1984. The Trust currently has six series, including the
Funds. Prior to December 22, 1994, the Trust was called Transamerica
Bond Fund and the Funds were called Transamerica U.S. Government Trust
and Transamerica Intermediate Government Trust.
The Fund is managed by John Hancock Advisers, Inc. (the
"Adviser"), a wholly-owned indirect subsidiary of John Hancock Mutual
Life Insurance Company (the "Life Company"), chartered in 1862 with
national headquarters at John Hancock Place, Boston, Massachusetts.
John Hancock Funds, Inc. ("John Hancock Funds") acts as principal
distributor of the shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
JOHN HANCOCK U.S. GOVERNMENT TRUST: The investment objective of
U.S. Government Fund is to earn a high level of current income
consistent with safety of principal by investing in debt obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including certificates of the Government National
Mortgage Association and U.S. Treasury obligations. In order to hedge
against changes in interest rates, U.S. Government Fund may purchase
put and call options and sell interest rate futures contracts and call
options on such contracts. Investments of U.S. Government Fund are
limited to those which a federally chartered savings and loan
association may, without limitation as to percentage of assets, invest
in, sell, redeem, hold or otherwise deal with.
JOHN HANCOCK INTERMEDIATE GOVERNMENT TRUST: The investment
objective of Intermediate Government Fund is to earn a high level of
current income, consistent with the preservation of capital and
maintenance of liquidity. Intermediate Government Fund invests in
debt obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities") having an
average dollar weighted maturity of between one and ten years.
Mortgages backing the securities purchased by the Funds include
not only conventional 30-year fixed rate mortgages but also graduated
payment mortgages and 15-year mortgages. All of these mortgages can
be used to create pass through securities.
GNMA CERTIFICATES. Certificates of the Government National
Mortgage Association ("GNMA") are mortgage-backed securities, which
evidence an undivided interest in a pool of mortgage loans. GNMA
Certificates differ from bonds in that principal is paid back monthly
by the borrower over the term of the loan rather than returned in a
lump sum at maturity. GNMA Certificates entitle the holder to receive
a share of all interest and principal prepayments paid and owed on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless
of whether or not the mortgagor actually makes the payment. The
National Housing Act authorizes GNMA to guarantee the timely payment
of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or the Farmer's
Home Administration ("FHMA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the United States. The GNMA is also empowered to borrow
without limitation from the U.S. Treasury if necessary to make any
payments required under its guarantee.
-2-
<PAGE> 54
FNMA SECURITIES. Established in 1938 to create a secondary
market in mortgages, the Federal National Mortgage Association
("FNMA") is a government-sponsored corporation owned entirely by
private stockholders that purchases residential mortgages from a list
of approved seller/servicers. FNMA issues guaranteed mortgage
pass-through certificates ("FNMA Certificates"). FNMA Certificates
resemble GNMA Certificates in that each FNMA Certificate represents a
pro rata share of all interest and principal payments made and owed on
the underlying pool. FNMA guarantees timely payment of interest on
FNMA Certificates and the stated principal amount.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 through enactment of Title III of the
Emergency Home Finance Act of 1970. Its purpose is to promote
development of a nationwide secondary market in conventional
residential mortgages. FHLMC presently issues two types of mortgage
pass-through securities, mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA
Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool.
The FHLMC guarantees timely monthly payment of interest on PCs and the
stated principal amount.
CERTAIN INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES. In order to generate additional
income, a Fund may, from time to time, lend securities from its
portfolios to brokers, dealers and financial institutions such as
banks and trust companies. Such loans will be secured by collateral
consisting of cash or U.S. Government securities which will be
maintained in an amount equal to at least 100% of the current market
value of the loaned securities. During the period of the loan, the
Fund will receive the income on both the loaned securities and the
collateral and thereby increase its return. Cash collateral will be
invested in short-term high quality debt securities, which will
increase the current income of the Fund. The loans will be terminable
by the Funds at any time and by the borrower on one day's notice. The
Funds will have the right to regain record ownership of loaned
securities to exercise beneficial rights such as rights to interest or
other distributions or voting rights on important issues. The Funds
may pay reasonable fees to persons unaffiliated with the Funds for
services in arranging such loans. Lending of portfolio securities
involves a risk of failure by the borrower to return the loaned
securities, in which event the Funds may incur a loss.
SECURITIES TRANSACTIONS SUBJECT TO DELAYED SETTLEMENT. As
described under "Investments, Techniques and Risk Factors" in each
Fund's Prospectus, securities may be purchased for which the normal
settlement date occurs later than the settlement date which is normal
for U.S. Government obligations. In no event, however, will the
settlement date in the case of Intermediate Government Fund occur
later than the 29th day after the trade date. Securities held in a
Fund's portfolio are subject to changes in value (both experiencing
appreciation when interest rates decline and depreciation when
interest rates rise) based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in
the level of interest rates. Purchasing securities subject to delayed
settlement can involve a risk that the yields available in the market
when the delivery takes place may actually be higher than those
obtained in the transaction itself. A separate account of the Fund
consisting of cash or liquid, high grade debt securities equal to the
amount of the delayed settlement commitments will be established at
the Trust's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited securities
will be valued at market value using the valuation procedures for all
other investments. If the market or fair value of such securities
declines, additional cash or liquid, high grade debt securities will
be placed in the account daily so
-3-
<PAGE> 55
that the value of the account will equal the amount of such
commitments by the Fund. On the settlement date of these delayed
settlement securities, the Fund will meet its obligations from the
available cash flow, sale of securities held in the separate account,
sale of other securities or, although it would not normally expect to
do so, from sale of the delayed settlement securities themselves
(which may have a value greater or lesser than the Fund's payment
obligations). Sale of securities to meet such obligations will
generally result in the realization of capital gains or losses.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Funds may
purchase securities on a when-issued basis. "When-issued" refers to
securities whose terms are available and for which a market exists,
but which have not been issued. A Fund will engage in when-issued
transactions with respect to securities purchased for its portfolio in
order to obtain what is considered to be an advantageous price and
yield at the time of the transaction. For when-issued transactions,
no payment is made until delivery is due, often a month or more after
the purchase.
When a Fund engages in when-issued transactions, it relies on the
seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund losing the
opportunity to obtain a price and yield considered to be advantageous.
The purchase of securities on a when-issued basis also involves a risk
of loss if the value of the security to be purchased declines prior to
the settlement date.
On the date that a Fund enters into an agreement to purchase
securities on a when-issued basis, the Fund will segregate in a
separate account cash or short-term money market instruments equal in
value to the Fund's commitment. These assets will be valued daily at
market, and additional cash or securities will be segregated in a
separate account to the extent that the total value of the assets in
the account declines below the amount of the when-issued commitments.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase
agreements. A repurchase agreement is a contract under which a Fund
would acquire a security for a relatively short period (generally not
more than 7 days) subject to the obligation of the seller to
repurchase and the Fund to resell such security at a fixed time and
price (representing the Fund's cost plus interest). A Fund will enter
into repurchase agreements only with member banks of the Federal
Reserve System and with securities dealers. The Adviser will
continuously monitor the creditworthiness of the parties with whom a
Fund enters into repurchase agreements. The Funds have established a
procedure providing that the securities serving as collateral for each
repurchase agreement must be delivered to the Funds' custodian either
physically or in book-entry form and that the collateral must be
marked to market daily to ensure that each repurchase agreement is
fully collateralized at all times. In the event of bankruptcy or
other default by a seller of a repurchase agreement, a Fund could
experience delays in liquidating the underlying securities and could
experience losses, including the possible decline in the value of the
underlying securities during the period in which the Fund seeks to
enforce its rights thereto, possible subnormal levels of income and
lack of access to income during this period, and the expense of
enforcing its rights.
GOVERNMENT SECURITIES. Certain U.S. Government securities,
including U.S. Treasury bills, notes and bonds, and Government
National Mortgage Association certificates ("Ginnie Maes"), are
supported by the full faith and credit of the United States. Certain
other U.S. Government securities, issued or guaranteed by Federal
agencies or government sponsored enterprises, are not supported by the
full faith and credit of the United States, but may be supported by
the right of the issuer to borrow from the U.S. Treasury. These
securities include obligations of the Federal Home Loan Mortgage
Corporation ("Freddie Macs"), and obligations
-4-
<PAGE> 56
supported by the credit of the instrumentality, such as Federal
National Mortgage Association Bonds ("Fannie Maes"). No assurance can
be given that the U.S. Government will provide financial support to
such Federal agencies, authorities, instrumentalities and government
sponsored enterprises in the future.
MORTGAGE-BACKED SECURITIES. The Funds may invest in mortgage
pass-through certificates and multiple-class pass-through securities,
such as real estate mortgage investment conduits ("REMIC")
pass-through certificates, collateralized mortgage obligations
("CMOs") and stripped mortgage-backed securities ("SMBS"), and other
types of "Mortgage-Backed Securities" that may be available in the
future.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. Guaranteed mortgage
pass-through securities represent participation interests in pools of
residential mortgage loans and are issued by U.S. Governmental or
private lenders and guaranteed by the U.S. Government or one of its
agencies or instrumentalities, including but not limited to the
Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Ginnie Mae certificates are
guaranteed by the full faith and credit of the U.S. Government for
timely payment of principal and interest on the certificates. Fannie
Mae certificates are guaranteed by Fannie Mae, a federally chartered
and privately owned corporation, for full and timely payment of
principal and interest on the certificates. Freddie Mac certificates
are guaranteed by Freddie Mac, a corporate instrumentality of the U.S.
Government, for timely payment of interest and the ultimate collection
of all principal of the related mortgage loans.
MULTIPLE-CLASS PASS-THROUGH SECURITIES AND COLLATERALIZED
MORTGAGE OBLIGATIONS. CMOs and REMIC pass-through or participation
certificates may be issued by, among others, U.S. Government agencies
and instrumentalities as well as private lenders. CMOs and REMIC
certificates are issued in multiple classes and the principal of and
interest on the mortgage assets may be allocated among the several
classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is
issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Generally,
interest is paid or accrues on all classes of CMOs or REMIC
certificates on a monthly basis.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or
Freddie Mac certificates but also may be collateralized by other
mortgage assets such as whole loans or private mortgage pass-through
securities. Debt service on CMOs is provided from payments of
principal and interest on the underlying mortgaged assets and any
reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under
the Code and invests in certain mortgages primarily secured by
interests in real property and other permitted investments. Investors
may purchase "regular" and "residual" interest shares of beneficial
interest in a REMIC, although the Funds do not intend to invest in
residual interests.
STRIPPED MORTGAGE-BACKED SECURITIES. SMBS are derivative
multiple-class mortgage- backed securities. SMBS are usually
structured with two classes that receive different proportions of
interest and principal distributions on a pool of mortgage assets. A
typical SMBS will have one class receiving some of the interest and
most of the principal, while the other class will receive most of the
interest and the remaining principal. In the most extreme case, one
class will receive all of the interest (the "interest only" class)
while the other class will receive all of the principal
-5-
<PAGE> 57
(the "principal only" class). The yields and market risk of interest
only and principal only SMBS, respectively, may be more volatile than
those of other fixed income securities. The staff of the SEC
considers privately issued SMBS to be illiquid.
STRUCTURED OR HYBRID NOTES. The Funds may invest in "structured"
or "hybrid" notes. The distinguishing feature of a structured or
hybrid note is that the amount of interest and/or principal payable on
the note is based on the performance of a benchmark asset or market
other than fixed-income securities or interest rates. Examples of
these benchmarks include stock prices, currency exchange rates and
physical commodity prices. Investing in a structured note allows a
Fund to gain exposure to the benchmark market while fixing the maximum
loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, a Fund may
forego all or part of the interest and principal that would be payable
on a comparable conventional note; the Fund's loss cannot exceed this
foregone interest and/or principal. An investment in structured or
hybrid notes involves risks similar to those associated with a direct
investment in the benchmark asset.
RISK FACTORS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES.
Investing in Mortgage- Backed Securities involves certain risks,
including the failure of a counter-party to meet its commitments,
adverse interest rate changes and the effects of prepayments on
mortgage cash flows. In addition, investing in the lowest tranche of
CMOs and REMIC certificates involves risks similar to those associated
with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of
traditional fixed income securities. The major differences typically
include more frequent interest and principal payments (usually
monthly), the adjustability of interest rates, and the possibility
that prepayments of principal may be made substantially earlier than
their final distribution dates.
Prepayment rates are influenced by changes in current interest
rates and a variety of economic, geographic, social and other factors
and cannot be predicted with certainty. Both adjustable rate mortgage
loans and fixed rate mortgage loans may be subject to a greater rate
of principal prepayments in a declining interest rate environment and
to a lesser rate of principal prepayments in an increasing interest
rate environment. Under certain interest rate and prepayment rate
scenarios, a Fund may fail to recoup fully its investment in
Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When the Fund reinvests
amounts representing payments and unscheduled prepayments of
principal, it may receive a rate of interest that is lower than the
rate on existing adjustable rate mortgage pass-through securities.
Thus, Mortgage-Backed Securities, and adjustable rate mortgage
pass-through securities in particular, may be less effective than
other types of U.S. Government securities as a means of "locking in"
interest rates.
Conversely, in a rising interest rate environment, a declining
prepayment rate will extend the average life of many Mortgage-Backed
Securities. This possibility is often referred to as extension risk.
Extending the average life of a Mortgage-Backed Security increases the
risk of depreciation due to future increases in market interest rates.
RISK ASSOCIATED WITH SPECIFIC TYPES OF DERIVATIVE DEBT
SECURITIES. Different types of derivative debt securities are subject
to different combinations of prepayment, extension and/or interest
rate risk. Conventional mortgage pass-through securities and
sequential pay CMOs are subject to all of these risks, but are
typically not leveraged. Thus, the magnitude of exposure may be less
than for more leveraged Mortgage-Backed Securities.
-6-
<PAGE> 58
The risk of early prepayments is the primary risk associated with
interest only debt securities ("IOs"), super floaters, other leveraged
floating rate instruments and Mortgage-Backed Securities purchased at
a premium to their par value. In some instances, early prepayments
may result in a complete loss of investment in certain of these
securities. The primary risks associated with certain other
derivative debt securities are the potential extension of average life
and/or depreciation due to rising interest rates.
These securities include floating rate securities based on the
Cost of Funds Index ("COFI floaters"), other "lagging rate" floating
rate securities, floating rate securities that are subject to a
maximum interest rate ("capped floaters"), Mortgage-Backed Securities
purchased at a discount, leveraged inverse floating rate securities
("inverse floaters"), principal only debt securities ("POs"), certain
residual or support tranches of CMOs and index amortizing notes.
Index amortizing notes are not Mortgage-Backed Securities, but are
subject to extension risk resulting from the issuer's failure to
exercise its option to call or redeem the notes before their stated
maturity date. Leveraged inverse IOs combine several elements of the
Mortgage-Backed Securities described above and thus present an
especially intense combination of prepayment, extension and interest
rate risks.
Planned amortization class ("PAC") and target amortization class
("TAC") CMO bonds involve less exposure to prepayment, extension and
interest rate risk than other Mortgage-Backed Securities, provided
that prepayment rates remain within expected prepayment ranges or
"collars." To the extent that prepayment rates remain within these
prepayment ranges, the residual or support tranches of PAC and TAC
CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present
more complex types of interest rate risks. For example, range
floaters are subject to the risk that the coupon will be reduced to
below market rates if a designated interest rate floats outside of a
specified interest rate band or collar. Dual index or yield curve
floaters are subject to depreciation in the event of an unfavorable
change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual
period. Thus, the type of risk involved in these securities depends
on the terms of each individual X-reset floater.
The Funds are permitted to engage in certain hedging techniques
involving options and futures transactions in order to reduce the
effect of interest rate movements affecting the market values of the
investments held, or intended to be purchased, by the Funds.
OPTIONS ON DEBT SECURITIES. The U.S. Government Fund may
purchase put and call options on debt securities which are traded on a
national securities exchange (an "Exchange") to protect its holdings
in an underlying or related security against a substantial decline in
market value. Securities are considered related if their price
movements generally correlate to one another. The purchase of put
options on debt securities which are related to securities held in its
portfolio will enable the Fund to protect, at least partially,
unrealized gains in an appreciated security in its portfolio without
actually selling the security. In addition, the Fund may continue to
receive interest income on the security. The purchase of call options
on debt securities may help to protect against substantial increases
in prices of securities the Fund intends to purchase pending its
ability to invest in such securities in an orderly manner.
The U.S. Government Fund may sell put and call options it has
previously purchased, which could result in a net gain or loss
depending on whether the amount realized on the sale is
-7-
<PAGE> 59
more or less than the premium and other transaction costs paid in
connection with the option which is sold.
The purchase of put and call options involves certain risks. If
a put or call option purchased by the U.S. Government Fund is not sold
when it has remaining value, and if the market price of the underlying
security remains equal to or greater than the exercise price, in the
case of a put, or equal to or less than the exercise price, in the
case of a call, the Fund will lose its entire investment in the
option. Also, where a put or a call option on a particular security
is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the
price of the related security.
The U.S. Government Fund will not invest in a put or a call
option if as a result the amount of premiums paid for such options
then outstanding would exceed 10% of the Fund's total assets.
FUTURES CONTRACTS AND RELATED OPTIONS. The Funds may engage in
the purchase and sale of interest rate futures contracts ("financial
futures") and related options for the purposes and subject to the
limitations described below. Currently, the Funds may engage in such
transactions with respect to U.S. Treasury Bonds, U.S. Treasury Notes,
and GNMA's on the Chicago Board of Trade and with respect to U.S.
Treasury bills on the International Money Market at the Chicago
Mercantile Exchange.
The Intermediate Government Fund may purchase financial futures
contracts only as a hedge against changes in the general level of
interest rates. The U.S. Government Fund may purchase financial
futures contracts only to close an existing short position in a
futures contract. The purchase of a financial futures contract
obligates the buyer to accept and pay for the specific type of debt
security called for in the contract at a specified future time and at
a specified price. A Fund would purchase a financial futures contract
when it is not fully invested in long-term debt securities but wishes
to defer its purchases for a time until it can invest in such
securities in an orderly manner or because short-term yields are
higher than long-term yields. Such purchases would enable the Fund to
earn the income on a short-term security while at the same time
minimizing the effect of all or part of an increase in the market
price of the long-term debt security which the Fund intends to
purchase in the future. A rise in the price of the long-term debt
security prior to its purchase either would generally be offset by an
increase in the value of the futures contract purchased by the Fund or
avoided by taking delivery of the debt securities under the futures
contract.
The Funds may sell financial futures contracts only as a hedge
against changes in interest rates. The sale of a financial futures
contract obligates the seller to deliver the specific type of debt
security called for in the contract at a specified future time and at
a specified price. A Fund would sell a financial futures contract in
order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline in
market value of that security which would accompany an increase in
interest rates. If interest rates did rise, a decline in the value of
the debt security held by the Fund would be substantially offset by an
increase in the value of the futures contract sold by the Fund. While
the Fund could sell a long-term debt security and invest in a
short-term security, ordinarily the Fund would give up income on its
investment, since long-term rates normally exceed short-term rates.
In addition, the Funds may engage in certain transactions
involving put and call options on financial futures contracts to hedge
against changes in interest rates. The U.S. Government Fund may
purchase put and call options and sell call options on financial
futures contracts for hedging
-8-
<PAGE> 60
purposes and may enter into closing transactions with respect to such
options to close an existing position. The Intermediate Government
Fund may purchase put and call options on financial futures contracts
which are traded on a securities exchange or board of trade for
hedging purposes and may also enter into closing transactions with
respect to such options to close an existing position. Options on
financial futures contracts are similar to options on securities
except that a put option on a financial futures contract gives the
purchaser the right in return for the premium paid to assume a short
position in a financial futures contract and a call option on a
financial futures contract gives the purchaser the right in return for
the premium paid to assume a long position in a financial futures
contract.
A Fund may hedge up to the full value of its portfolio through
the use of options and futures. At the time a Fund purchases a
financial futures contract or a call option on such a futures
contract, an amount of cash or U.S. Government Securities at least
equal to the market value of the futures contract will be deposited in
a segregated account with the Funds' Custodian to collateralize the
position and thereby insure that such futures contract is unleveraged.
A Fund may not purchase or sell futures contracts or related put or
call options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures and related options positions
and the amount of premiums paid for related options (measured at the
time of investment) would exceed 5% of the Fund's total assets.
While a Fund's hedging transactions may protect the Fund against
adverse movements in the general level of interest rates, such
transactions could also preclude the opportunity to benefit from
favorable movements in the level of interest rates. Due to the
imperfect correlation between movements in the prices of futures
contracts and movements in the prices of the related securities being
hedged, the price of a futures contract may move more than or less
than the price of the securities being hedged. Options on futures
contracts are generally subject to the same risks applicable to all
option transactions. In addition, a Fund's ability to use this
technique will depend in part on the development and maintenance of a
liquid secondary market for such options. For a discussion of the
inherent risks involved with futures contracts and options thereon,
see "Risks Relating to Transactions in Futures Contracts and Related
Options" below.
The Funds' policies permitting the purchase and sale of futures
contracts and certain related put or call options only for hedging
purposes may not be changed without the approval of shareholders
holding a majority of the applicable Fund's outstanding voting
securities. The Board of Trustees may authorize procedures, including
numerical limitations, with regard to such transactions in furtherance
of a Fund's investment objectives. Such procedures are not deemed to
be fundamental and may be changed by the Board of Trustees without the
vote of the Fund's shareholders.
The U.S. Government Fund is also authorized to, but presently
does not intend to, engage in certain investment techniques involving
the sale of covered call and secured put options for the purpose of
generating additional income. The Fund will not engage in such
transactions without first having given shareholders at least 60 days'
written notice.
RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS AND RELATED
OPTIONS. Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a market for such futures.
Although the Funds intend to purchase or sell futures contracts only
on exchanges or boards of trade where there appears to be an active
market, there is no assurance that a liquid market on an exchange or
board of trade will exist for any particular contract or at any
particular time. In the event a liquid market does not exist, it may
not be possible to close a
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<PAGE> 61
futures position, and in the event of adverse price movements, an
affected Fund would continue to be required to make daily cash
payments of maintenance margin. In addition, limitations imposed by
an exchange or board of trade on which futures contracts are traded
may compel or prevent a Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of
a liquid market in futures contracts might cause a Fund to make or
take delivery of the underlying securities at a time when it may be
disadvantageous to do so. The purchase of put options on futures
contracts involves less potential dollar risk to the Fund than an
investment of equal amount in futures contracts, since the premium is
the maximum amount of risk the purchaser of the option assumes. The
entire amount of the premium paid for an option can be lost by the
purchaser, but no more than that amount.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT
SECURITIES
Treasury Bonds and Notes. Because trading interest in options
written on Treasury bonds and notes tends to center on the most
recently auctioned issues, the Exchanges will not continue
indefinitely to introduce options with new expirations to replace
expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition
of a limited number of new expirations as the original ones expire.
Options trading on each issue of bonds or notes will thus be phased
out as new options are listed on more recent issues, and options
representing a full range of expirations will not ordinarily be
available for every issue on which options are traded.
Treasury Bills. Because the deliverable Treasury bill changes
from week to week, writers of Treasury bill calls cannot provide in
advance for their potential exercise settlement obligations by
acquiring and holding the underlying security. However, if the U.S.
Government Fund holds a long position in Treasury bills with a
principal amount corresponding to the principal amount of the
securities deliverable upon exercise of the option, it may be hedged
from a risk standpoint. In addition, the U.S. Government Fund will
maintain Treasury bills maturing no later than those which would be
deliverable in the event of an assignment of an exercise notice in a
segregated account with its Custodian so that it will be treated as
being covered for margin purposes.
GNMA Certificates. The following special considerations will be
applicable to the writing of call options on GNMA Certificates by U.S.
Government Fund when and if trading of options thereon commences.
Since the remaining principal balance of GNMA Certificates declines
each month as a result of mortgage payments, the U.S. Government Fund
as a writer of a GNMA call holding GNMA Certificates as "cover" to
satisfy its delivery obligation in the event of exercise may find that
the GNMA Certificates it holds no longer have a sufficient remaining
principal balance for this purpose. Should this occur, the Fund will
purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in
order to maintain its cover. If for any reason, the Fund were no
longer covered, the Fund will either enter into a closing purchase
transaction or replace such Certificate with a Certificate which
represents cover. When the Fund closes its position or replaces such
Certificate, it may realize an unanticipated loss and incur
transaction costs.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment
restrictions. The fundamental restrictions set forth below as well as
the Funds' investment objectives and fundamental policies and
restrictions set forth in the Prospectuses may not be changed without
approval of a majority of
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<PAGE> 62
the applicable Fund's outstanding voting securities. Under the
Investment Company Act of 1940, as amended (the "1940 Act"), and as
used in the Prospectuses and this SAI, a "majority of the outstanding
voting securities" requires the approval of the lesser of (1) the
holders of 67% or more of the shares of a Fund represented at a
meeting if the holders of more than 50% of the outstanding shares of
the Fund are present in person or by proxy or (2) the holders of more
than 50% of the outstanding shares of the Fund.
Under these restrictions, a Fund may not:
1. Make short sales of securities or purchase securities on
margin, except for such short-term loans as are necessary
for the clearance of purchases of portfolio securities.
2. Engage in the underwriting of securities except insofar as
the Fund may be deemed an underwriter under the Securities
Act of 1933 in disposing of a portfolio security or purchase
securities which are not readily marketable.
3. Purchase or sell real estate or interests therein, including
limited partnership interests although the Fund may purchase
securities of issuers which engage in real estate operations
and securities which are secured by real estate or interests
therein.
4. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except
that the Trust may invest in securities of companies which
invest in or sponsor such programs.
5. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets.
6. Invest for the purpose of exercising control or management
of another company.
7. Invest in securities of any company if, to the knowledge of
the Trust, any officer or director of the Trust or its
Adviser owns more than 1/2 of 1% of the outstanding
securities of such company, and all such officers and
directors own in the aggregate more than 5% of the
outstanding securities of such company.
8. Issue senior securities, as defined in the Act, except that
the Fund may enter into repurchase agreements, lend
portfolio securities, and borrow as described below.
9. Make loans of money or securities, except by (a) the
purchase of fixed income obligations; (b) investing in
repurchase agreements; or (c) lending its portfolio
securities. See "Investments, Techniques and Risk Factors"
in the Prospectus.
10. Write or purchase put or call options or purchase or sell
commodities or commodity futures contracts except the Fund
may purchase such options on debt securities and purchase or
sell financial futures contracts and purchase options
thereon.
11. Invest in warrants or rights except where acquired in units
or attached to other securities.
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<PAGE> 63
12. Enter into a repurchase agreement maturing in more than
seven days, if as a result such repurchase agreements
together with restricted securities and securities for which
there are no readily available market quotations would
constitute more than 10% of the Fund's total assets, or
enter into reverse repurchase agreements exceeding in the
aggregate one-third of the market value of the Fund's total
assets less liabilities other than obligations created by
reverse repurchase agreements.
13. Invest more than 5% of the market or other fair value of its
assets in the securities of any one issuer and shall not
purchase more than 10% of the voting securities or more than
10% of any class of securities of any one issuer. This
restriction does not apply to U.S. Government securities as
defined in the Prospectuses.
14. Borrow in excess of 15% of the market or fair value of its
total assets or pledge its assets to an extent greater than
10% of the market or other fair value of its total assets.
Borrowings must be from banks and undertaken only as a
temporary measure for extraordinary or emergency purposes.
Collateral arrangements maintained in connection with the
writing of covered call options or margin deposits in
connection with the sale of futures contracts and related
options are not deemed to be a pledge or other encumbrance.
The restriction on borrowing does not prohibit the use of
reverse repurchase agreements in an amount (including any
borrowings) not to exceed 33 1/3% of the Fund's net assets.
In addition, U.S. Government Fund may invest only in those
investments which a federally chartered savings and loan association
by law or regulation may, without limitation as to percentage of
assets, invest in, sell, redeem, hold or otherwise deal with. The
Intermediate Government Trust may not invest more than 25% of its
total assets in the securities of issuers in any single industry,
provided that there shall be no such limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.
Notwithstanding any investment restriction to the contrary, the
Funds may, in connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/ Directors, purchase
securities of other investment companies within the John Hancock Group
of Funds provided that, as a result, (i) no more than 10% of the
Fund's assets would be invested in securities of all other investment
companies, (ii) such purchase would not result in more than 3% of the
total outstanding voting securities of any one such investment company
being held by the Fund and (iii) no more than 5% of the Fund's assets
would be invested in any one such investment company.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Funds is managed by the Trust's Trustees who
elect officers who are responsible for the day-to-day operations of
each Fund and who execute policies formulated by the Trustees.
Several of the officers and Trustees of the Trust are also officers
and directors of the Adviser or officers and directors of John Hancock
Funds.
Set forth below is the principal occupation or employment of the
Trustees and officers of the Trust during the past five years.
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<PAGE> 64
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Trustee, Chairman and Chief Executive
101 Huntington Avenue Chairman and Officer, the Adviser and The
Boston, MA 02199 Chief Executive Berkeley Financial Group
Officer(1)(2) ("The Berkeley Group");
Chairman, NM Capital
Management, Inc. ("NM
Capital"); John Hancock
Advisers International Limited
("Advisers International");
John Hancock Funds, Inc.;
John Hancock Investor
Services Corporation
("Investor Services"); and
Sovereign Asset Management
Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Inc., Investor
Services and SAMCorp are
collectively referred to as the
"Affiliated Companies");
Chairman, First Signature
Bank & Trust; Director, John
Hancock Freedom Securities
Corporation, John Hancock
Capital Corporation, New
England/Canada Business
Council; Member, Investment
Company Institute Board of
Governors; Trustee, Museum
of Science; President, the
Adviser (until July 1992);
Trustee or Director of other
investment companies
managed by the Adviser; and
Chairman, John Hancock
Distributors, Inc. (until April,
1994).
James F. Carlin Trustee Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc. (insurance);
Natick, MA 01760 Director, Arbella Mutual
Insurance Company
(insurance), Consolidated
Group Trust (group health
plan), Carlin Insurance
</TABLE>
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<PAGE> 65
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
Agency, Inc. and West
Insurance Agency, Inc.;
Receiver, the City of Chelsea
(until August 1992); and
Trustee or Director of other
investment companies
managed by the Adviser.
William H. Cunningham Trustee Chancellor, University of
601 Colorado Street Texas System and former
O'Henry Hall President of the University of
Austin, TX 78701 Texas, Austin, Texas; Regents
Chair in Higher Education
Leadership; James L. Bayless
Chair for Free Enterprise;
Professor of Marketing and
Dean College of Business
Administration/Graduate
School of Business
(1983-1985); Centennial Chair
in Business Education
Leadership, 1983-1985;
Director, LaQuinta Motor Inns,
Inc. (hotel management
company); Director,
Jefferson-Pilot Corporation
(diversified life insurance
company); Director,
Freeport-McMoran Inc. (oil
and gas company); Director,
Barton Creek Properties, Inc.
(1988-1990) (real estate
development) and LBJ
Foundation Board (education
foundation); and Advisory
Director, Texas Commerce
Bank - Austin.
Charles L. Ladner Trustee(3) Director, Energy North, Inc.
UGI Corporation (public utility holding
460 North Gulph Road company); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
(public utility holding
company) (until 1992); and
Trustee or Director of other
investment companies
managed by the Adviser.
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
Leo E. Linbeck, Jr. Trustee Chairman, President, Chief
3810 W. Alabama Executive Officer and
Houston, TX 77027 Director, Linbeck Corporation
(a holding company engaged
in various phases of the
construction industry and
warehousing interests);
Director and Chairman,
Federal Reserve Bank of
Dallas; Chairman of the Board
and Chief Executive Officer,
Linbeck Construction
Corporation; Director,
Panhandle Eastern Corporation
(a diversified energy
company); Director, Daniel
Industries, Inc. (manufacturer
of gas measuring products and
energy related equipment);
Director, GeoQuest
International, Inc. (a
geophysical consulting firm);
and Director, Greater Houston
Partnership.
Patricia P. McCarter Trustee(3) Director and Secretary, the
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer); and Trustee or
Malvern, PA 19355 Director of other investment
companies managed by the
Adviser.
Steven R. Pruchansky Trustee(1)(3) Director and Treasurer, Mast
360 Horse Creek Drive, #208 Holdings, Inc.; Director,
Naples, FL 33942 First Signature Bank & Trust
Company (until August 1991);
General Partner, Mast Realty
Trust; President, Maxwell
Building Corp. (until 1991);
and Trustee or Director of
other investment companies
managed by the Adviser.
Norman H. Smith Trustee(3) Lieutenant General, USMC,
Rt. 1, Box 249 E Deputy Chief of Staff for
Linden, VA 22642 Manpower and Reserve
Affairs, Headquarters Marine
Corps; Commanding General
III Marine Expeditionary
Force/3rd Marine Division
</TABLE>
-15-
<PAGE> 67
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
(retired 1991); and Trustee or
Director of other investment
companies managed by the
Adviser.
John P. Toolan Trustee(3) Director, The Smith Barney
13 Chadwell Place Muni Bond Funds, The Smith
Morristown, NJ 07960 Barney Tax-Free Money Fund,
Inc., Vantage Money Market
Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment
company) and Smith Barney
Trust Company of Florida;
Chairman, Smith Barney Trust
Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management
Company and Smith, Barney
Advisers, Inc. (investment
advisers) (retired 1991); and
Senior Executive Vice
President, Director and
member of the Executive
Committee, Smith Barney,
Harris Upham & Co.,
Incorporated (investment
bankers) (until 1991); and
Trustee or Director of other
investment companies
managed by the Adviser.
Robert G. Freedman* Vice Chairman President and Chief
101 Huntington Avenue and Chief Investment Officer, the
Boston, MA 02199 Investment Adviser.
Officer(2)
Anne C. Hodsdon* President(2) Executive Vice President, the
101 Huntington Avenue Adviser.
Boston, MA 02199
James B. Little* Senior Vice Senior Vice President, the
101 Huntington Avenue President and Adviser.
Boston, MA 02199 Chief Financial
Officer
Thomas H. Drohan* Senior Vice Senior Vice President and
101 Huntington Avenue President and Secretary, the Adviser.
Boston, MA 02199 Secretary
</TABLE>
-16-
<PAGE> 68
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
Michael P. DiCarlo* Senior Vice Senior Vice President, the
101 Huntington Avenue President(2) Adviser.
Boston, MA 02199
Edgar Larsen* Senior Vice Senior Vice President, the
101 Huntington Avenue President Adviser.
Boston, MA 02199
B.J. Willingham* Senior Vice Senior Vice President, the
101 Huntington Avenue President Adviser. Formerly, Director
Boston, MA 02199 and Chief Investment Officer
of Transamerica Fund
Management Company.
James J. Stokowski* Vice President Vice President, the Adviser.
101 Huntington Avenue and Treasurer
Boston, MA 02199
Susan S. Newton* Vice President Vice President and Assistant
101 Huntington Avenue and Compliance Secretary, the Adviser.
Boston, MA 02199 Officer
John A. Morin* Vice President. Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
<FN>
__________________
* An "interested person" of the Fund, as such term is defined in the 1940 Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust, the
Executive Committee may generally exercise most of the powers of the Board of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Committee on Administration.
(4) A Member of the Audit, Administration and Compensation Committees.
</TABLE>
All of the officers listed are officers or employees of the
Adviser or affiliated companies. Some of the Trustees and officers
may also be officers and/or directors and/or trustees of one or more
of the other funds for which the Adviser serves as investment adviser.
As of April 28, 1995, there were 980,071 shares of the
Intermediate Government Fund and 2,298,041 shares of U.S. Government
Trust outstanding and officers and Trustees of the Trust as a group
beneficially owned less than 1% of the outstanding shares of the Trust
and of each of the Funds. At such date, the following shareholders
held, as record owner, 5% or more of the shares of the respective
Funds:
-17-
<PAGE> 69
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
INTERMEDIATE GOVERNMENT TRUST: OF OUTSTANDING SHARES
------------------------------ ---------------------
<S> <C>
Merrill Lynch Pierce Fenner & Smith 17.3%
Trade House Account - Book Entry
Team B - 3rd Floor
4800 Deer Lake Drive East
Jacksonville, FL 32246
U.S. Government Trust:
----------------------
Merchants & Marine Bank 13.24%
Attn: Mike Dickson
P. O. Box 279
Pascagoula, MS 39567-0729
Merrill Lynch Pierce Fenner & Smith Inc. 10.18%
Trade House Account - Book Entry
Team B - 3rd Floor
4800 Deer Lake Drive East
Jacksonville, FL 32246
River Production Co. Inc. 8.77%
P. O. Box 909
Columbia, MS 39429-0909
Northern Trust Co. Ttee. 6.52%
FBO Adventist Health System/West
Attn: Tiffany Snyder
P. O. Box 92956
A/C 822-85446/4-866770
Chicago, IL 60675-29
First Diboll Company 5.97%
P. O. Box 152020
Lufkin, TX 75915-2020
Municipal Workers Compensation Fund Inc. 5.84%
P. O. Box 1270
Montgomery, AL 36102
Baptist General Convention of Texas 5.63%
333 N. Washington
Dallas, TX 75246-1798
Home Federal Savings Bank 5.41%
Attn: Helen Groves Coleman
9108 Woodward Avenue
Detroit, MI 48202-1699
</TABLE>
-18-
<PAGE> 70
As of December 22, 1994, the Trustees have established an
Advisory Board which acts to facilitate a smooth transition of
management over a two-year period (between Transamerica Fund
Management Company ("TFMC"), the prior investment adviser, and the
Adviser). The members of the Advisory Board are distinct from the
Board of Trustees, do not serve the Fund in any other capacity and are
persons who have no power to determine what securities are purchased
or sold and behalf of the Fund. Each member of the Advisory Board may
be contacted at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal
occupations during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management
services); former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from
Texas; co-founder, Houston Parents' League; former board member
of various civic and cultural organizations in Houston, including
the Houston Symphony, Museum of Fine Arts and YWCA. Mrs. Bentsen
is presently active in various civic and cultural activities in
the Washington, D.C. area, including membership on the Area Board
for The March of Dimes and is a National Trustee for the Botanic
Gardens of Washington, D. C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief
Executive Officer, TFMC; Director, West Central Advisory Board,
Texas Commerce Bank; Trustee, Memorial Hospital System; Chairman
of the Board of Regents of Baylor University; Member, Board of
Governors, National Association of Securities Dealers, Inc.;
Formerly, Chairman, Investment Company Institute; formerly,
President, Houston Chapter of Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company;
Director, Houston Industries and Houston Lighting and Power
Company; Director, TransAmerican Companies (natural gas producer
and transportation); Member, Board of Managers, Harris County
Hospital District; Advisory Director, Commercial State Bank, El
Campo; Advisory Director, First National Bank of Bryan; Advisory
Director, Sterling Bancshares; Former Director and Vice Chairman,
Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
COMPENSATION OF THE BOARD OF TRUSTEES AND ADVISORY BOARD. Each
Trustee who is not an "interested person," as such term is defined in
the 1940 Act ("Independent Trustee"), receives an annual retainer of
$44,000, a meeting fee of $4,000 for each of the four regularly
scheduled meetings held during the year and a fee of $25 per day or
actual travel expenses, whichever is greater. This compensation is
apportioned among the John Hancock funds, including the U.S.
Government Fund and Intermediate Government Fund, on which such
Trustees serve based on the net asset value of such funds. Advisory
Board Members receive from the John Hancock funds an annual retainer
of $40,000 and a meeting fee of $7,000 for each of the two regularly
scheduled meetings to be held in 1995 and the one in 1996. For the
fiscal year ended March 31, 1994, the Trust paid Trustees' fees in the
aggregate of $26,337 to all the Trustees then serving as such.
-19-
<PAGE> 71
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Funds receive their
investment advice from the Adviser. Investors should refer to the
Prospectuses for a description of certain information concerning the
investment management contracts. Each of the Trustees and principal
officers affiliated with the Trust who is also an affiliated person of
the Adviser is named above, together with the capacity in which such
person is affiliated with the Trust or the Adviser.
The Adviser, located at 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, was organized in 1968 and currently has over
$13 billion in assets under management in its capacity as investment
adviser to the Funds and the other mutual funds and publicly traded
investment companies in the John Hancock group of funds having a
combined total of over 800,000 shareholders. The Adviser is a
wholly-owned subsidiary of The Berkeley Financial Group, which is in
turn a wholly-owned subsidiary of John Hancock Subsidiaries, Inc.,
which is in turn a wholly-owned subsidiary of the Life Company, one of
the most recognized and respected financial institutions in the
nation. With total assets under management of over $80 billion, the
Life Company is one of the ten largest life insurance companies in the
United States, and carries Standard & Poor's and A.M. Best's highest
ratings. Founded in 1862, the Life Company has been serving clients
for over 130 years.
As described in the Prospectus under the caption "Organization
and Management of the Fund," the Trust, on behalf of each Fund, has
entered into an investment management contract with the Adviser.
Under the investment management contracts, the Adviser provides the
Funds with (i) a continuous investment program, consistent with each
Fund's stated investment objective and policies, (ii) supervision of
all aspects of the Funds' operations except those that are delegated
to a custodian, transfer agent or other agent and (iii) such
executive, administrative and clerical personnel, officers and
equipment as are necessary for the conduct of their business. The
Adviser is responsible for the day-to-day management of each Fund's
portfolio assets.
No person other than the Adviser and its directors and employees
regularly furnishes advice to the Funds with respect to the
desirability of the Funds investing in, purchasing or selling
securities. The Adviser may from time to time receive statistical or
other similar factual information, and information regarding general
economic factors and trends, from the Life Company and its affiliates.
Under the terms of the investment management contracts with the
Funds, the Adviser provides the Trust with office space, equipment and
supplies and other facilities and personnel required for the business
of the Trust. The Adviser pays the compensation of all officers and
employees of the Trust and pays the expenses of clerical services
relating to the administration of each Fund. All expenses which are
not specifically paid by the Adviser and which are incurred in the
operation of the Trust including, but not limited to, (i) the fees of
the Independent Trustees, (ii) the fees of the members of the Trust's
Advisory Board (described above) and (iii) the continuous public
offering of the shares of the Funds are borne by the Funds and/or the
other series of the Trust. Subject to the conditions set forth in a
private letter ruling that the Funds have received from the Internal
Revenue Service relating to their multiple-class structure, class
expenses properly allocable to any Class A or Class B shares will be
borne exclusively by such class of shares.
-20-
<PAGE> 72
The investment management contract with the Trust, on behalf of
Intermediate Government Fund, provides that the Trust shall pay the
Adviser for its services, out of the assets of Intermediate Government
Fund, a monthly fee, computed at the annual rate of 0.50% of the
average daily net assets of Intermediate Government Fund. Prior to
April 1, 1993, investment advisory fees paid by the Intermediate
Government Fund amounted to 0.45% of its average daily net assets. On
February 16, 1993, the Trust's Board of Trustees, including all of the
Independent Trustees, approved an amendment to the investment
management contract whereby the fee payable to the Fund's prior
investment adviser under the investment management contract be
increased to 0.50% of the average daily net assets of Intermediate
Government Fund, and at a meeting on March 29, 1993, shareholders of
Intermediate Government Fund approved the amended investment
management contract.
<TABLE>
The investment management contract with the Trust, on behalf of
U.S. Government Fund, provides that the Trust shall pay the Adviser
for its services, out of the assets of U.S. Government Fund, a monthly
fee, computed at the following rates:
<CAPTION>
AVERAGE DAILY NET ASSETS OF FEE
JOHN HANCOCK U.S. GOVERNMENT TRUST (ANNUAL RATE)
---------------------------------- -------------
<S> <C>
On the first $200 million............ 0.650%
On the next $300 million............. 0.625%
On the excess over $500 million...... 0.600%
</TABLE>
The Adviser may voluntarily and temporarily reduce its advisory
fee or make other arrangements to limit each Fund's expenses to a
specified percentage of its average daily net assets. The Adviser
retains the right to re-impose the advisory fee and recover any other
payments to the extent that, at the end of any fiscal year, such
Fund's annual expenses fall below this limit.
In the event normal operating expenses of a Fund, exclusive of
certain expenses prescribed by state law, are in excess of any state
limit where that Fund is registered to sell shares of beneficial
interest, the fee payable to the Adviser will be reduced to the extent
of such excess and the Adviser will make any additional arrangements
necessary to eliminate any remaining excess expenses. Currently, the
most restrictive limit applicable to each Fund is 2.5% of the first
$30,000,000 of the Fund's average daily net asset value, 2% of the
next $70,000,000 and 1.5% of the remaining average daily net asset
value.
Pursuant to the investment management contracts, the Adviser is
not liable to the Funds or their shareholders for any error of
judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which their respective contracts
relate, except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its
duties or from its reckless disregard of the obligations and duties
under the applicable contract.
The term of each investment management contract expires on
December 22, 1996 and each contract will continue in effect from year
to year thereafter if approved annually by a vote of a majority of the
Independent Trustees of the Trust, on behalf of the affected Fund,
cast in person at a meeting called for the purpose of voting on such
approval, and by either a majority of the Trustees or the holders of a
majority of the affected Fund's outstanding voting securities. A
management contract may, on 60 days' written notice, be terminated at
any time without the payment of any penalty by the affected Fund by
vote of a majority of the outstanding voting
-21-
<PAGE> 73
securities of the affected Fund, by the Trustees or by the Adviser. A
management contract terminates automatically in the event of its
assignment.
Securities held by the Funds may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates
provide investment advice. Because of different investment objectives
or other factors, a particular security may be bought for one or more
funds or clients when one or more are selling the same security. If
opportunities for the purchase or sale of securities by the Adviser or
for other funds or clients for which the Adviser renders investment
advice arise for consideration at or about the same time, transactions
in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of
them. To the extent that transactions on behalf of more than one
client of the Adviser or its affiliates may increase the demand for
securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
Under the investment management contracts, the Funds may use the
name "John Hancock" or any name derived from or similar to it only as
long as the applicable investment management contract or any
extension, renewal or amendment thereof remains in effect. If a
Fund's investment management contract is no longer in effect, that
Fund (to the extent that it lawfully can) will cease to use such name
or any other name indicating that it is advised by or otherwise
connected with the Adviser. In addition, the Adviser or the Life
Company may grant the non- exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity,
including but not limited to any investment company of which the Life
Company or any subsidiary or affiliate thereof or any successor to the
business of any subsidiary or affiliate thereof shall be the
investment adviser.
For the fiscal years ended March 31, 1992, 1993 and 1994,
advisory fees payable by Intermediate Government Fund to TFMC amounted
to $5,904, $6,588 and $24,447, respectively; however, a portion of
such fees was not imposed pursuant to the voluntary fee and expense
limitation arrangements then in effect (see "Financial Highlights" in
the Prospectus). For the fiscal years ended March 31, 1992, 1993 and
1994, advisory fees payable by U.S. Government Fund to TFMC amounted
to $704,437, $128,579 and $143,566, respectively.
ADMINISTRATIVE SERVICES AGREEMENT. The Trust, on behalf of the
Funds, was a party to administrative services agreements with TFMC
(the "Services Agreements"), pursuant to which TFMC performed
bookkeeping and accounting services and functions, including preparing
and maintaining various accounting books, records and other documents
and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Funds. Other
administrative services included communications in response to
shareholder inquiries and certain printing expenses of various
financial reports. In addition, such staff and office space,
facilities and equipment was provided as necessary to provide
administrative services to the Funds. The Services Agreements were
amended in connection with the appointment of the Adviser as adviser
to the Funds to permit services under the Agreements to be provided to
the Funds by the Adviser and its affiliates. The Services Agreements
were terminated during the current fiscal year.
For the fiscal years ended March 31, 1992, 1993 and 1994, the
amounts paid by Intermediate Government Fund pursuant to its Services
Agreement (before expense reimbursement) were $21,064, $21,062 and
$28,021, respectively. Of such amounts, $17,977, $17,952 and $24,751,
respectively, were paid to TFMC and $3,087, $3,110 and $3,270,
respectively, were paid for certain data processing services.
-22-
<PAGE> 74
For the fiscal years ended March 31, 1992, 1993 and 1994, U.S.
Government Fund reimbursed TFMC $14,972, $47,572 and $38,604,
respectively, for such services. Of such amounts $74,568, $37,082 and
$28,654, respectively, were paid to TFMC and $17,404, $10,490 and
$9,950, respectively, were paid for certain data processing and
pricing information services.
DISTRIBUTION CONTRACTS
DISTRIBUTION CONTRACTS. As discussed in the Prospectuses, each
Fund's shares are sold on a continuous basis at the public offering
price. John Hancock Funds, a wholly-owned subsidiary of the Adviser,
has the exclusive right, pursuant to the Distribution Contracts dated
December 22, 1994 (the "Distribution Contracts"), to purchase shares
from the Funds at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all
broker-dealers ("Selling Brokers") with whom it has sales agreements,
John Hancock Funds may allow such Selling Brokers up to the full
applicable sales charge during periods specified in such notice.
During these periods, such Selling Brokers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The Distribution Contracts were initially adopted by the
affirmative vote of the Trust's Board of Trustees including the vote a
majority of the Independent Trustees cast in person at a meeting
called for such purpose. Each Distribution Contract shall continue in
effect until December 22, 1995 and from year to year thereafter if
approved by either the vote of the relevant Fund's shareholders or the
Board of Trustees, including the vote of a majority of the Independent
Trustees, cast in person at a meeting called for such purpose. A
Distribution Contract may be terminated at any time, without penalty,
by either party upon sixty (60) days' written notice or by a vote of a
majority of the outstanding voting securities of the relevant Fund and
terminates automatically in the case of an assignment by John Hancock
Funds.
Total underwriting commissions for sales of the Class A shares of
Intermediate Government Fund and U.S. Government Fund for the fiscal
years ended March 31, 1992 were $8,798 and $12,225; for 1993 were
$5,066 and $2,267; and for 1994 were $0 and $172, respectively. Of
the amounts, for sales of Class A shares of Intermediate Government
Fund, $1,014, $215 and $0 was retained by Transamerica Fund
Distributors, Inc., the Funds' former distributor, for the fiscal
years ended March 31, 1992, 1993 and 1994, respectively, and the
remainders were reallowed to dealers. For sales of Class A shares of
U.S. Government Fund, $1,226, $104 and $0 was retained by Transamerica
Fund Distributors, Inc. for the fiscal years ended March 31, 1992,
1993 and 1994, respectively, and the remainders were reallowed to
dealers.
DISTRIBUTION PLAN. The Board of Trustees, including the
Independent Trustees of the Trust, approved new distribution plans for
each Fund pursuant to Rule 12b-1 under the 1940 Act for Class A
shares ("Class A Plans") and Class B shares ("Class B Plans"). Such
Plans were approved by a majority of the outstanding shares of each
respective class on December 16, 1994 and became effective on December
22, 1994.
Under the Class A Plans, the distribution or service fee will not
exceed an annual rate of 0.25% of the average daily net asset value of
the Class A shares of the Funds (determined in accordance with the
appropriate Fund's Prospectus as from time to time in effect). Any
expenses under a Fund's Class A Plan not reimbursed within 12 months
of being presented to such Fund for
-23-
<PAGE> 75
repayment are forfeited and not carried over to future years. Under
the Class B Plans, the distribution or service fee to be paid by the
Funds will not exceed an annual rate of 1.00% of the average daily net
assets of the Class B shares of the Funds (determined in accordance
with the appropriate Fund's prospectus as from time to time in
effect); provided that the portion of such fee used to cover Service
Expenses (described below) shall not exceed an annual rate of 0.25% of
the average daily net asset value of the Class B shares of the
respective Fund. Under the Class B Plans, the fee covers the
Distribution and Service Expenses (described below) and interest
expenses on unreimbursed distribution expenses. In accordance with
generally accepted accounting principles, the Funds do not treat
unreimbursed distribution expenses as a liability of the Fund and do
not reduce the current net assets of Class B shares by such amount,
although the amount may be payable in the future.
Under the Plans, expenditures shall be calculated and accrued
daily and paid monthly or at such other intervals as the Trustees
shall determine. The fee may be spent by John Hancock Funds on
Distribution Expenses or Service Expenses. "Distribution Expenses"
include any activities or expenses primarily intended to result in the
sale of shares of the relevant class of the Funds, including, but not
limited to: (i) initial and ongoing sales compensation payable out of
such fee as such compensation is received by John Hancock Funds or by
Selling Brokers, (ii) direct out-of-pocket expenses incurred in
connection with the distribution of shares, including expenses related
to printing of prospectuses and reports; (iii) preparation, printing
and distribution of sales literature and advertising material; (iv) an
allocation of overhead and other branch office expenses of John
Hancock Funds related to the distribution of Fund Shares (v)
distribution expenses that were incurred by a Fund's former
distributor and not recovered through payments under the Class A or
Class B former plans or through receipt of contingent deferred sales
charges; and (vi) in the event that any other investment company (the
"Acquired Fund") sells all or substantially all of its assets to
merges with or otherwise engages in a combination with a Fund,
distribution expenses originally incurred in connection with the
distribution of the Acquired Fund's shares. Service Expenses under
the Plans include payments made to, or on account of, account
executives of selected broker-dealers (including affiliates of John
Hancock Funds) and others who furnish personal and shareholder account
maintenance services to shareholders of the relevant class of the
Fund.
During the fiscal year ended March 31, 1994, total payments made
under the Class A Plan by U.S. Government Fund to TFMC amounted to
$43,954, and, of such amount, (1) $15,892 represented payments for
distribution and/or administrative services provided by dealers, (2)
$5,935 represented payments for services provided to new shareholders
by John Hancock Funds, (3) $6,407 represented payments for the cost of
printing and distributing Prospectuses and Statements of Additional
Information and various Fund reports to investors, (4) $12,670
represented payments for various sales literature and (5) $3,050
represented payments for advertising. There were no payments made
under the Class A Plan by Intermediate Government Trust during the
fiscal year ended March 31, 1994.
The Board of Trustees authorized two classes of shares of
beneficial interest for each Fund on July 19, 1994. Accordingly, no
payments were made under the Class B Plans during the fiscal year
ended March 31, 1994.
Each of the Plans provides that it will continue in effect only
as long as its continuance is approved at least annually by a majority
of both the Trustees and the Independent Trustees. Each of the Plans
provides that it may be terminated (a) at any time by vote of a
majority of the Trustees, a majority of the Independent Trustees, or a
majority of the respective Class'
-24-
<PAGE> 76
outstanding voting securities or (b) by John Hancock Funds on 60 days'
notice in writing to the affected Fund. Each of the Plans further
provides that it may not be amended to increase the maximum amount of
the fees for the services described therein without the approval of a
majority of the outstanding shares of the class of the affected Fund
which has voting rights with respect to the Plan. Each of the Plans
provides that no material amendment to the Plan will, in any event, be
effective unless it is approved by a majority vote of the Trustees and
the Independent Trustees of the Trust. The holders of Class A shares
and Class B shares have exclusive voting rights with respect to the
Plan applicable to their respective class of shares of the Fund in
which they are shareholders. In adopting the Plans, the Board of
Trustees has determined that, in its judgment, there is a reasonable
likelihood that the Plans will benefit the holders of the applicable
class of shares of the Funds.
Information regarding the services rendered under the Plans and
the Distribution Contracts and the amounts paid therefor by the
respective Class of the Funds are provided to, and reviewed by, the
Board of Trustees on a quarterly basis. In its quarterly review, the
Board of Trustees considers the continued appropriateness of the Plans
and the Distribution Contracts and the level of compensation provided
therein.
When the Trust seeks an Independent Trustee to fill a vacancy or
as a nominee for election by shareholders, the selection or nomination
of the Independent Trustee is, under resolutions adopted by the
Trustees contemporaneously with their adoption of the Plans, committed
to the discretion of the Committee on Administration of the Trustees.
The members of the Committee on Administration are all Independent
Trustees and identified in this Statement of Additional Information
under the heading "Those Responsible for Management."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a
Fund's shares, the following procedures are utilized wherever
applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of
which generally utilize electronic data processing techniques to
determine valuations for normal institutional size trading units of
debt securities without exclusive reliance upon quoted prices.
Short-term debt investments which have a remaining maturity of 60
days or less are generally valued at amortized cost, which the
Trustees have determined approximates market value. If market
quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market
value, the fair value of the security may be determined in good faith
in accordance with procedures approved by the Trustees.
A Fund will not price its securities on the following national
holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
-25-
<PAGE> 77
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charges applicable to purchases of Class A shares of
the Funds are described in each Fund's Class A and Class B Prospectus.
Methods of obtaining reduced sales charges referred to generally in
the Prospectuses are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares, the
investor is entitled to cumulate current purchases with the greater of
the current value (at offering price) of the Class A shares of such
Fund, or if Investor Services is notified by the investor's dealer or
the investor at the time of the purchase, the cost of the Class A
shares owned.
COMBINED PURCHASES. In calculating the sales charge applicable
to purchases of Class A shares made at one time, the purchases will be
combined if made by (a) an individual, his or her spouse and their
children under the age of 21 purchasing securities for his or her own
account, (b) a trustee or other fiduciary purchasing for a single
trust, estate or fiduciary account and (c) certain groups of four or
more individuals making use of salary deductions or similar group
methods of payment whose funds are combined for the purchase of mutual
fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from
Investor Services or a Selling Broker's representative.
WITHOUT SALES CHARGE. As described in the Prospectuses, Class A
shares of the Funds may be sold without a sales charge to certain
persons described in the Prospectuses.
ACCUMULATION PRIVILEGE. Investors (including investors combining
purchases) who are already Class A shareholders may also obtain the
benefit of the reduced sales charge by taking into account not only
the amount then being invested but also the purchase price or value of
the Class A shares already held by such person.
COMBINATION PRIVILEGE. Reduced sales charges (according to the
schedule set forth in each Fund's Class A and Class B Prospectus) also
are available to an investor based on the aggregate amount of his
concurrent and prior investments in Class A shares of such Fund and
shares of all other John Hancock funds which carry a sales charge.
LETTER OF INTENTION. The reduced sales loads are also applicable
to investments made over a specified period pursuant to a Letter of
Intention (LOI), which should be read carefully prior to its execution
by an investor. The Funds offer two options regarding the specified
period for making investments under the LOI. All investors have the
option of making their investments over a period of thirteen (13)
months. Investors who are using the Funds as a funding medium for a
qualified retirement plan, however, may opt to make the necessary
investments called for by the LOI over a forty-eight (48) month
period. These qualified retirement plans include IRAs, SEP, SARSEP,
TSA, 401(k) plans, TSA plans and 457 plans. Such an investment
(including accumulations and combinations) must aggregate $50,000 or
more invested during the specified period from the date of the LOI or
from a date within ninety (90) days prior thereto, upon written
request to Investor Services. The sales charge applicable to all
amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such
aggregate amount is not actually invested, the difference in the sales
charge actually paid and the sales charge payable had the LOI not been
in effect is due from the investor. However, for the purchases
actually made within the specified period (either 13 or 48 months),
the sales charge applicable will not be higher than that which would
have been applied (including accumulations and combinations) had the
LOI been for the amount actually invested.
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The LOI authorizes Investor Services to hold in escrow sufficient
Class A shares (approximately 5% of the aggregate) to make up any
difference in sales charges on the amount intended to be invested and
the amount actually invested, until such investment is completed
within the specified period, at which time the escrow shares will be
released. If the total investment specified in the LOI is not
completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Investor Services to act as
his attorney-in-fact to redeem any escrow shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment
by an investor to purchase, or by the Funds to sell, any additional
shares and may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value
per share without the imposition of a sales charge so that applicable
Fund will receive the full amount of the purchase payment.
CONTINGENT DEFERRED SALES CHARGE. Class B shares which are
redeemed within six years of purchase will be subject to a contingent
deferred sales charge ("CDSC") at the rates set forth in each Fund's
Class A and Class B Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal
to the lesser of the current market value or the original purchase
cost of the Class B shares being redeemed. Accordingly, no CDSC will
be imposed on increases in account value above the initial purchase
prices, including Class B shares derived from reinvestment of
dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number
of years from the time of payment for the purchase of Class B shares
until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the
purchases of shares, all payments during a month will be aggregated
and deemed to have been made on the last day of the month.
Proceeds from the CDSC are paid to John Hancock Funds and are
used in whole or in part by John Hancock Funds to defray its expenses
related to providing distribution-related services to the Funds in
connection with the sale of the Class B shares, such as the payment of
compensation to select Selling Brokers for selling Class B shares.
The combination of the CDSC and the distribution and service fees
facilitates the ability of the Funds to sell the Class B shares
without a sales charge being deducted at the time of the purchase.
See each Fund's Class A and Class B Prospectus for additional
information regarding the CDSC.
SPECIAL REDEMPTIONS
Although it would not normally do so, each Fund has the right to
pay the redemption price of shares of the Fund in whole or in part in
portfolio securities as prescribed the Trustees. When the shareholder
sells portfolio securities received in this fashion, he would incur a
brokerage charge. Any such securities would be valued for the
purposes of making such payment at the same value as used in
determining net asset value. The Funds have elected to be governed by
Rule 18f-1 under the 1940 Act, pursuant to which each Fund is
obligated to redeem shares solely
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in cash up to the lesser of $250,000 or 1% of the net asset value of
the applicable Fund during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE. As described more fully in the Prospectuses,
the Funds permit exchanges of shares of any class of the Funds for
shares of the same class in any other John Hancock fund offering that
class.
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in the Class A
and Class B Prospectuses, the Funds permit the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent
proceeds arising from the redemption of Fund shares. Since the
redemption price of Fund shares may be more or less than the
shareholder's cost, depending upon the market value of the securities
owned by a Fund at the time of redemption, the distribution of cash
pursuant to this plan may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of
a Systematic Withdrawal Plan concurrently with purchases of additional
Class A or Class B shares of a Fund could be disadvantageous to a
shareholder because of the initial sales charge payable on such
purchases of Class A shares and the CDSC imposed on redemptions of
Class B shares and because redemptions are taxable events. Therefore,
a shareholder should not purchase Fund shares at the same time as a
Systematic Withdrawal Plan is in effect. The Funds reserve the right
to modify or discontinue the Systematic Withdrawal Plan of any
shareholder on 30 days' prior written notice to such shareholder, or
to discontinue the availability of such plan in the future. The
shareholder may terminate the plan at any time by giving proper notice
to Investor Services.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM ("MAAP"). This program is
explained fully in each Fund's Class A and Class B Prospectus and the
Account Privileges Application. The program, as it relates to
automatic investment checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior
notice if any investment is not honored by the shareholder's bank.
The bank shall be under no obligation to notify the shareholder as to
the non-payment of any check.
The program may be discontinued by the shareholder either by
calling Investor Services or upon written notice to Investor Services
which is received at least five (5) business days prior to the due
date of any investment.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Fund
shares may, within 120 days after the date of redemption, reinvest
without payment of a sales charge any part of the redemption proceeds
in shares of the same class of that Fund or another John Hancock
mutual fund, subject to the minimum investment limit in that fund.
The proceeds from the redemption of Class A shares may be reinvested
at net asset value without paying a sales charge in Class A shares of
the Funds or in Class A shares of another John Hancock mutual fund.
If a CDSC was paid upon a redemption, a shareholder may reinvest the
proceeds from that redemption at net asset value in additional shares
of the class from which the redemption was made. The shareholder's
account will be credited with the amount of any CDSC charged upon the
prior redemption and the
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new shares will continue to be subject to the CDSC. The holding
period of the shares acquired through reinvestment will, for purposes
of computing the CDSC payable upon a subsequent redemption, include
the holding period of the redeemed shares. The Funds may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction
for Federal income tax purposes even if the reinvestment privilege is
exercised, and any gain or loss realized by a shareholder on the
redemption or other disposition of Fund shares will be treated for tax
purposes as described under the caption "Tax Status."
DESCRIPTION OF THE TRUST'S SHARES
Ownership in the Funds is represented by transferable shares of
beneficial interest. The Declaration of Trust permits the Trustees to
create an unlimited number of series and classes of shares of the
Trust and, with respect to each series and class, to issue an
unlimited number of full or fractional shares and to divide or combine
the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests of the series.
Each share of each series or class of the Trust represents an
equal proportionate interest with each other in that series or class,
none having priority or preference over other shares of the same
series or class. The interest of investors in the various series or
classes of the Trust is separate and distinct. All consideration
received for the sales of shares of a particular series or class of
the Trust, all assets in which such consideration is invested and all
income, earnings and profits derived from such investments will be
allocated to and belong to that series or class. As such, each such
share is entitled to dividends and distributions out of the net income
belonging to that series or class as declared by the Board of
Trustees. Shares of the Trust have a par value of $0.01 per share.
The assets of each series are segregated on the Trust's books and are
charged with the liabilities of that series and with a share of the
Trust's general liabilities. The Board of Trustees determines those
assets and liabilities deemed to be general assets or liabilities of
the Trust, and these items are allocated among each series in
proportion to the relative total net assets of each series. In the
unlikely event that the liabilities allocable to a series exceed the
assets of that series, all or a portion of such liabilities may have
to be borne by the other series.
Pursuant to the Declaration of Trust, the Trustees have
established six series of shares, including the Funds, and may
authorize the creation of additional series of shares (the proceeds of
which would be invested in separate, independently managed portfolios)
and additional classes within any series (which would be used to
distinguish among the rights of different categories of shareholders,
as might be required by future regulations or other unforeseen
circumstances). The four other series of Trust are John Hancock
Adjustable U.S. Government Trust, John Hancock Investment Quality Bond
Fund, John Hancock Government Securities Trust and John Hancock
Adjustable U.S. Government Fund. As of the date of this Statement of
Additional Information, the Trustees have authorized the issuance of
two classes of shares of the Funds, designated as Class A and Class B.
Class A and Class B shares of each Fund represent an equal
proportionate interest in the aggregate net asset values attributable
to that class of such Fund. Holders of Class A shares and Class B
shares each have certain exclusive voting rights on matters relating
to the Class A Plan and the Class B Plan, respectively, of the
applicable Fund. The different classes of the Funds may bear
different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of
shares.
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Dividends paid by the Funds, if any, with respect to each class
of shares will be calculated in the same manner, at the same time and
on the same day and will be in the same amount, except that (i) the
distribution and service fees relating to Class A and Class B shares
relating to Class A and Class B shares will be borne exclusively by
that Class, (ii) Class B shares will pay higher distribution and
service fees than Class A shares and (iii) each of Class A shares and
Class B shares will bear any class expenses properly allocable to such
class of shares, subject to the conditions set forth in a private
letter ruling that the Fund has received from the Internal Revenue
Service relating to its multiple-class structure. Accordingly, the
net asset value per share may vary depending whether Class A shares or
Class B shares are purchased.
VOTING RIGHTS. Shareholders are entitled to a full vote for each
full share held. The Trustees themselves have the power to alter the
number and the terms of office of Trustees, and they may at any time
lengthen their own terms or make their terms of unlimited duration
(subject to certain removal procedures) and appoint their own
successors, provided that at all times at least a majority of the
Trustees have been elected by shareholders. The voting rights of
shareholders are not cumulative, so that holders of more than 50% of
the shares voting can, if they choose, elect all Trustees being voted
upon, while the holders of the remaining shares would be unable to
elect any Trustees. Although the Trust need not hold annual meetings
of shareholders, the Trustees may call special meetings of
shareholders for action by shareholder vote as may be required by the
1940 Act or the Declaration of Trust. Also, a shareholder's meeting
must be called if so requested in writing by the holders of record of
10% or more of the outstanding shares of the Trust. In addition, the
Trustees may be removed by the action of the holders of record of
two-thirds or more of the outstanding shares.
SHAREHOLDER LIABILITY. The Declaration of Trust provides that no
Trustee, officer, employee or agent of the Trust is liable to the
Trust or any series or to a shareholder, nor is any Trustee, officer,
employee or agent liable to any third persons in connection with the
affairs of the Trust, except as such liability may arise from his or
its own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties. It also provides that all third persons
shall look solely to the particular series' property for satisfaction
of claims arising in connection with the affairs of that series. With
the exceptions stated, the Declaration of Trust provides that a
Trustee, officer, employee or agent is entitled to be indemnified
against all liability in connection with the affairs of the Trust.
As a Massachusetts business trust, the Trust is not required to
issue share certificates. The Trust shall continue without limitation
of time subject to the provisions in the Declaration of Trust
concerning termination by action of the shareholders.
Under Massachusetts law, shareholders of a Massachusetts business
trust could, under certain circumstances, be held personally liable
for acts or obligations of the trust. However, the Trust's
Declaration of Trust contains an express disclaimer of shareholder
liability for acts, obligations and affairs of the Trust. The
Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held
personally liable by reason of being or having been a shareholder.
Liability is therefore limited to circumstances in which the Trust
itself would be unable to meet its obligations, and the possibility of
this occurrence is remote.
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TAX STATUS
Each Fund is treated as a separate entity for accounting and tax
purposes. Each Fund has qualified and elected to be treated as a
"regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue
to so qualify in the future. As such and by complying with the
applicable provisions of the Code regarding the sources of its income,
the timing of its distributions, and the diversification of its
assets, each Fund will not be subject to Federal income tax on its net
income (including net short- term and long-term capital gain) which is
distributed to shareholders at least annually in accordance with the
timing requirements of the Code.
Each Fund will be subject to a 4% non-deductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum
distribution requirements. Each Fund intends under normal
circumstances to avoid liability for such tax by satisfying such
distribution requirements.
Distributions from a Fund's current or accumulated earnings and
profits ("E&P"), as computed for Federal income tax purposes, will be
taxable as described in the Funds' Prospectuses whether taken in
shares or in cash. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's
tax basis in Fund shares and thereafter (after such basis is reduced
to zero) will generally give rise to capital gains. Shareholders
electing to receive distributions in the form of additional shares
will have a cost basis for Federal income tax purposes in each share
so received equal to the amount of cash they would have received had
they elected to receive the distributions in cash, divided by the
number of shares received.
For each Fund, the amount of net short-term and long-term capital
gains, if any, in any given year will vary depending upon the
Adviser's current investment strategy and whether the Adviser believes
it to be in the best interest of the Fund to dispose of portfolio
securities or enter into options or futures transactions that will
generate capital gains. At the time of an investor's purchase of Fund
shares, a portion of the purchase price is often attributable to
realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such appreciation may be
taxable to such investor even if the net asset value of the investor's
shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption of shares of a Fund (including by exercise of
the exchange privilege) a shareholder may realize a taxable gain or
loss depending upon his basis in his shares. Such gain or loss will
be treated as capital gain or loss if the shares are capital assets in
the shareholder's hands and will be long-term or short-term, depending
upon the shareholder's tax holding period for the shares. A sales
charge paid in purchasing Class A shares of a Fund cannot be taken
into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their
purchase to the extent shares of the Fund or another John Hancock Fund
are subsequently acquired without payment of a sales charge pursuant
to the reinvestment or exchange privilege. Such disregarded load will
result in an increase in the shareholder's tax basis in the shares
subsequently acquired. Also, any loss realized on a redemption or
exchange may be disallowed to the extent the shares disposed of are
replaced with other shares of the same Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are
disposed of, such as pursuant to the Dividend Reinvestment Plan. In
such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized upon the
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redemption of shares with a tax holding period of six months or less
will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain with
respect to such shares.
Although its present intention is to distribute all net
short-term and long-term capital gains, if any, each Fund reserves the
right to retain and reinvest all or any portion of its "net capital
gain," which is the excess, as computed for Federal income tax
purposes, of net long-term capital gain over net short-term capital
loss in any year. The Funds will not in any event distribute net
long-term capital gains realized in any year to the extent that a
capital loss is carried forward from prior years against such gain.
To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to
Federal income tax in the hands of a Fund. Each shareholder would be
treated for Federal income tax purposes as if such Fund had
distributed to him on the last day of its taxable year his pro rata
share of such excess, and he had paid his pro rata share of the taxes
paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of
such excess as long-term capital gain income in his return for his
taxable year in which the last day of the Fund's taxable year falls,
(b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the Fund, and (c)
be entitled to increase the adjusted tax basis for his shares in the
Fund by the difference between his pro rata share of such excess and
his pro rata share of such taxes.
For Federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss.
To the extent subsequent net capital gains are offset by such losses,
they would not result in Federal income tax liability to the
applicable Fund and, as noted above, would not be distributed as such
to shareholders. At December 31, 1994, the Intermediate Government
Fund had $735,389 of capital loss carryforwards available to offset
future net capital gains and such capital loss carryforwards expire as
follows: $28,597 in 1997 and $706,792 in 2002. At December 31, 1994,
the U.S. Government Fund had $53,533,889 of capital loss carryforwards
available to offset future net capital gains, and such capital loss
carryforwards expire as follows: $39,799,667 in 1996, $2,986,286 in
1997, $5,412,804 in 1998, $653,763 in 1999, $2,152,064 in 2000 and
$2,529,305 in 2002.
Dividends, including capital gain distributions, paid by the
Funds to their corporate shareholders will not qualify for the
corporate dividends received deduction in their hands.
Each Fund that invests in certain PIKs, zero coupon securities or
certain increasing rate securities (and, in general, any other
securities with original issue discount or with market discount if the
Fund elects to include market discount in income currently) must
accrue income on such investments prior to the receipt of the
corresponding cash payments. However, each Fund must distribute, at
least annually, all or substantially all of its net income, including
such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid Federal income and excise
taxes. Therefore, a Fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and
post-retirement distributions and certain prohibited transactions, is
accorded to accounts maintained as qualified retirement plans.
Shareholders should consult their tax advisers for more information.
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Each Fund may be required to account for its transactions in
dollar rolls in a manner that, under certain circumstances, may limit
the extent of its participation in such transactions.
Limitations imposed by the Code on regulated investment companies
like the Funds may restrict each Fund's ability to enter into futures
and options forward transactions.
Certain options and futures transactions undertaken by a Fund may
cause the Fund to recognize gains or losses from marking to market
even though its positions have not been sold or terminated and affect
the character as long-term or short-term and timing of some capital
gains and losses realized by the Fund. Also, certain of a Fund's
losses on its transactions involving options or futures contracts
and/or offsetting portfolio positions may be deferred rather than
being taken into account currently in calculating the Fund's taxable
income or gains. Certain of the applicable tax rules may be modified
if a Fund is eligible and chooses to make one or more of certain tax
elections that may be available. These transactions may therefore
affect the amount, timing and character of a Fund's distributions to
shareholders. The Funds will take into account the special tax rules
(including consideration of available elections) applicable to options
and futures contracts in order to minimize any potential adverse tax
consequences.
The foregoing discussion relates solely to U.S. Federal income
tax law as applicable to U.S. persons (i.e., U.S. citizens or
residents and U.S. domestic corporations, partnerships, trusts or
estates) subject to tax under such law. The discussion does not
address special tax rules applicable to certain classes of investors,
such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of
or gains realized on the redemption (including an exchange) of Fund
shares may also be subject to state and local taxes. Shareholders
should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership of shares of, and receipt of
distributions from, the Funds in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with
which their investment in a Fund is effectively connected will be
subject to U.S. Federal income tax treatment that is different from
that described above. These investors may be subject to nonresident
alien withholding tax at the rate of 30% (or a lower rate under an
applicable tax treaty) on amounts treated as ordinary dividends from a
Fund and, unless an effective IRS Form W-8 or authorized substitute is
on file, to 31% backup withholding on certain other payments from the
Fund. Non- U.S. investors should consult their tax advisers regarding
such treatment and the application of foreign taxes to an investment
in either Fund.
The Funds are not subject to Massachusetts corporate excise or
franchise taxes. Provided that a Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay
any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended September 30, 1994, the annualized
yield of Intermediate Government Fund's Class A shares was 4.96%, and
for the 30-day period ended September 30, 1994, the annualized yield
of U.S. Government Fund's Class A shares was 4.97%. The average
annual total returns of the Class A shares of the Intermediate
Government Fund for the one, five and life of the Fund (November 3,
1986 (initial public offering)) periods ended September 30, 1994 were
(9.13)%, 5.73% and 6.16%, respectively. The average annual total
returns of the Class
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A shares of the U.S. Government Fund for the one, five and life of the
Fund (inception) periods ended September 30, 1994 were (9.37)%, 5.88%
and 6.20%, respectively. The performance of the Intermediate
Government Fund would be lower if the Fund's former investment adviser
did not voluntarily limit the Fund's operating expenses.
Each Fund's yield is computed by dividing net investment income
per share determined for a 30-day period by the maximum offering price
per share (which includes the full sales charge) on the last day of
the period, according to the following standard formula:
Yield = 2[(a-b + 1)6 -1]
---
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of Fund shares outstanding during
the period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the
period (NAV where applicable).
Each Fund's total return is computed by finding the average
annual compounded rate of return over the 1-year, 5-year, and 10-year
periods that would equate the initial amount invested to the ending
redeemable value according to the following formula:
P (1 + T)n = ERV
P= a hypothetical initial investment of $1,000.
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the designated periods or fraction
thereof.
In the case of Class A shares or Class B shares, this calculation
assumes the maximum sales charge is included in the initial investment
or the CDSC is applied at the end of the period. This calculation
also assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period. The
"distribution rate" is determined by annualizing the result of
dividing the declared dividends of a Fund during the period stated by
the maximum offering price or net asset value at the end of the
period.
In addition to average annual total returns, a Fund may quote
unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, and/or a
series of redemptions, over any time period. Total returns may be
quoted with or without taking a Fund's maximum sales
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<PAGE> 86
charge on Class A shares or the CDSC on Class B shares into account.
Excluding a Fund's sales charge on Class A shares and the CDSC on
Class B shares from a total return calculation produces a higher total
return figure.
From time to time, in reports and promotional literature, a
Fund's yield and total return will be compared to indices of mutual
funds and bank deposit vehicles such as Lipper Analytical Services,
Inc.'s "Lipper -- Fixed Income Fund Performance Analysis," a monthly
publication which tracks net assets, total return, and yield on
approximately 1,700 fixed income mutual funds in the United States.
Ibbotson and Associates, CDA Weisenberger and F.C. Towers are also
used for comparison purposes, as well as the Russell and Wilshire
Indices.
Performance rankings and ratings reported periodically in
national financial publications such as MONEY Magazine, FORBES,
BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR,
STANGER'S and BARRON'S, etc. will also be utilized.
The performance of a Fund is not fixed or guaranteed.
Performance quotations should not be considered to be representations
of performance of a Fund for any period in the future. The
performance of a Fund is a function of many factors including its
earnings, expenses and number of outstanding shares. Fluctuating
market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest;
and changes in operating expenses are all examples of items that can
increase or decrease a Fund's performance.
ADDITIONAL PERFORMANCE INFORMATION. The Funds may use
comparative performance information from certain industry research
materials and/or published in various periodicals. The
characteristics of the investments in such comparisons may be
different from those investments of a Fund's portfolio. In addition,
the formula used to calculate the performance statistics of such
investments may not be identical to the formula used by a Fund to
calculate its performance figures. From time to time, advertisements
or information for the Funds may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or information may include symbols, headlines or other
material which highlight or summarize the information discussed in
more detail in the communication.
The following publications, indices, averages and investments
which may be used in advertisements or information concerning the
Funds for dissemination to investors or shareholders, include but are
not limited to:
a. Lipper-Mutual Fund Performance Analysis, Lipper-Fixed Income
Analysis, and Lipper Mutual Fund indices - measure total
return and average current yield for the mutual fund
industry. Ranks individual mutual fund performance over
specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
b. CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk,
total return, and average rate of return (average annual
compounded growth rate) over specified time periods for the
mutual fund industry.
c. Mutual Fund Source Book and "Morningstar Mutual Funds"
published by Morningstar, Inc. - analyzes price, yield,
risk, and total return for selected mutual funds. Its
ratings of 1 (low) and 5 (high) stars are based on a fund's
historical risk/
-35-
<PAGE> 87
reward ratio compared with similar funds for 3-, 5- and
10-year periods, including all sales charges and fees.
Morningstar, Inc., considered to be an expert in independent
fund performance monitoring, has consented to the use of its
ratings in Fund advertisements.
d. Financial publications: Barrons, Business Week, Personal
Finance, Financial World, Forbes, Fortune, "The Wall Street
Journal", Muni Week, Weisenberger Investment Companies
Service, Institutional Investor, and Money - rate fund
performance over specified time periods and provide other
relative performance or industry information.
e. Consumer Price Index (or Cost of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure
of change, over time, in the price of goods and services in
major expenditure groups.
f. Stocks, Bonds, Bills, and Inflation, published by Ibbotson
Associates - historical measure of yield, price, and total
return for common and small company stock, long-term
government bonds, Treasury bills, and inflation.
g. Savings and Loan Historical Interest Rates - as published in
the U.S. Savings & Loan League Fact Book.
h. Salomon Brothers Broad Bond Index or its component indices -
The Broad Index measures yield, price and total return for
Treasury, Agency, Corporate, and Mortgage bonds.
i. Salomon Brothers Composite High Yield Index or its component
indices - The High Yield Index measures yield, price and
total return for Long-Term High-Yield Index,
Intermediate-Term High-Yield Index and Long-Term Utility
High-Yield Index.
j. Lehman Brothers Aggregate Bond Index or its component
indices (including Municipal Bond Index) - The Aggregate
Bond Index measures yield, price and total return for
Treasury, Agency, Corporate, Mortgage Government/Corporate,
Government, Treasury, Intermediate, High Yield and Yankee
bonds.
k. Standard & Poor's Bond Indices - measure yield and price of
Corporate, Municipal, and government bonds.
l. Other taxable investments, including certificates of deposit
(CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds, and
repurchase agreements.
m. Historical data supplied by the research departments of
Lehman Hutton, First Boston Corporation, Morgan Stanley,
Salomon Brothers, Merrill Lynch, and Donaldson Lufkin and
Jenrette.
n. Donoghue's Money Fund Reports - industry averages for 7-day
annualized and compounded yields of taxable, tax-free and
government money funds.
-36-
<PAGE> 88
o. The Value Line Mutual Fund Survey, published by Value Line,
assigns rankings of 1 (best) to 5 (worst) in terms of risk
adjusted performance covering more than 2,000 equity and
fixed income mutual funds.
In addition, advertisements and sales materials may contain
hypothetical performance examples for purposes of illustrating
reinvestment (or "compounding") of dividends at fixed rates of return
or tax advantages to be derived from deferring payment of federal (and
state) income taxes (at maximum rates) as compared to taxable
investments assuming fixed rates of return. Illustrations may also
includes (1) hypothetical investments in various retirement plans,
such as IRAs, made by investors of various ages or (2) comparisons to
retirement plans funded by annuity or bank products.
In assessing such comparisons, an investor should consider the
following factors:
a. It is generally either not possible or not practicable to
invest in an average or index of certain investments.
b. Certificates of deposit issued by banks and other depository
institutions represent an alternative income producing
product. Certificates of deposit may offer fixed or
variable interest rates and principal is guaranteed and may
be insured. Withdrawal of deposits prior to maturity will
normally be subject to a penalty. Rates offered by banks
and other depository institutions are subject to change at
any time specified by the issuing institution.
c. United States Treasury Bills, Notes or Bonds represent
alternative income producing products. Treasury obligations
are issued in selected denominations. Rates of Treasury
obligations are fixed at the time of issuance and payment of
principal and interest is backed by the full faith and
credit of the United States government. The market value of
such instruments will generally fluctuate inversely with
interest rates prior to maturity and will equal par value at
maturity.
Past performance is no guarantee of future results. In addition,
investors are advised to consult their brokers or financial advisers
when considering an investment in a Fund based upon performance
comparisons.
The composition of the investments in such indexes and the
characteristics of such benchmark investments are not identical to,
and in some cases are very different from, those of a Fund's
portfolio. These indexes and averages are generally unmanaged and the
items included in the calculations of such indexes and averages may
not be identical to the formulas used by a Fund to calculate its
performance figures.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio
securities and the allocation of brokerage commissions are made by the
Adviser and officers of the Trust pursuant to recommendations made by
an investment committee of the Adviser, which consists of officers and
directors of the Adviser and affiliates and officers and Trustees who
are interested persons of the Trust. Orders for purchases and sales
of securities are placed in a manner which, in the opinion of the
officers of the Trust, will offer the best price and market for the
execution of each such
-37-
<PAGE> 89
transaction. Purchases from underwriters of portfolio securities may
include a commission or commissions paid by the issuer, and
transactions with dealers serving as market makers reflect a "spread."
Investments in debt securities are generally traded on a net basis
through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are payable on such transactions.
Each Fund's primary policy is to execute all purchases and sales
of portfolio instruments at the most favorable prices consistent with
best execution, considering all of the costs of the transaction
including brokerage commissions. This policy governs the selection of
brokers and dealers and the market in which a transaction is executed.
Consistent with the foregoing primary policy, the Rules of Fair
Practice of the NASD and other policies that the Trustees may
determine, the Adviser may consider sales of shares of the Funds as a
factor in the selection of broker-dealers to execute the Funds'
portfolio transactions.
To the extent consistent with the foregoing, the Funds will be
governed in the selection of brokers and dealers, and the negotiation
of brokerage commission rates and dealer spreads, by the reliability
and quality of the services, including primarily the availability and
value of research information and to a lesser extent statistical
assistance furnished to the Adviser of the Funds, and their value and
expected contribution to the performance of the Funds. It is not
possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to
the research efforts of the Adviser. The receipt of research
information is not expected to reduce significantly the expenses of
the Adviser. The research information and statistical assistance
furnished by brokers and dealers may benefit the Life Company or other
advisory clients of the Adviser, and conversely, brokerage commissions
and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the
Funds. The Funds will make no commitments to allocate portfolio
transactions upon any prescribed basis. While the Trust's officers
will be primarily responsible for the allocation of the Funds'
brokerage business, their policies and practices in this regard must
be consistent with the foregoing and will at all times be subject to
review by the Trustees. For the fiscal years ended March 31, 1994,
1993 and 1992, no negotiated brokerage commissions were paid on
portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of
1934, a Fund may pay to a broker which provides brokerage and research
services to the Fund an amount of disclosed commission in excess of
the commission which another broker would have charged for effecting
that transaction. This practice is subject to a good faith
determination by the Trustees that the price is reasonable in light of
the services provided and to policies that the Trustees may adopt from
time to time. During the fiscal year ended March 31, 1994, the Funds
did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and
evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect
sole shareholder of John Hancock Freedom Securities Corporation and
its subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker
Anthony") John Hancock Distributors, Inc. ("John Hancock
Distributors") and Sutro & Company, Inc. ("Sutro"), are broker-dealers
("Affiliated Brokers"). Pursuant to procedures determined by the
Trustees and consistent with the above policy of obtaining best net
results, the Fund may execute portfolio transactions with or through
Tucker Anthony or Sutro. During the year ended March 31, 1994, the
Funds did not execute any portfolio transactions with then affiliated
brokers.
-38-
<PAGE> 90
Any of the Affiliated Brokers may act as broker for a Fund on
exchange transactions, subject, however, to the general policy of the
Funds set forth above and the procedures adopted by the Trustees
pursuant to the 1940 Act. Commissions paid to an Affiliated Broker
must be at least as favorable as those which the Trustees believe to
be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased
or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than
the Affiliated Broker's contemporaneous charges for comparable
transactions for its other most favored, but unaffiliated, customers,
except for accounts for which the Affiliated Broker acts as a clearing
broker for another brokerage firm, and any customers of the Affiliated
Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the 1940 Act)
of the Trust, the Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an
investment adviser to the Funds, the obligation to provide investment
management services, which includes elements of research and related
investment skills, such research and related skills will not be used
by the Affiliated Brokers as a basis for negotiating commissions at a
rate higher than that determined in accordance with the above
criteria. The Funds will not effect principal transactions with
Affiliated Brokers. The Funds may, however, purchase securities from
other members of underwriting syndicates of which Tucker Anthony,
Sutro and John Hancock Distributors are members, but only in
accordance with the policy set forth above and procedures adopted and
reviewed periodically by the Trustees.
For the fiscal years ended March 31, 1992, 1993 and 1994, U.S.
Government Fund paid to the former investment adviser brokerage
commissions in the amounts of $39,911, $6,395 and $5,612,
respectively. The former investment adviser did not receive any
brokerage commissions on portfolio transactions effected on behalf of
Intermediate Government Fund.
Brokerage or other transaction costs of a Fund are generally
commensurate with the rate of portfolio activity. The portfolio
turnover rates for the Funds for (a) the fiscal year ended March 31,
1993 and (b) the fiscal year ended March 31, 1994 were:
Intermediate Government Fund - (a) 73% and (b) 89%.
U.S. Government Fund - (a) 342% and (b) 264%.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116,
Boston, MA 02205-9116, a wholly owned indirect subsidiary of the Life
Company, is the transfer and dividend paying agent for the Funds.
Intermediate Government Fund pays Investor Services monthly a transfer
agent fee equal to $16.00 per account for the Class A shares and
$18.50 per account for the Class B shares on an annual basis, plus
out-of-pocket expenses.
U.S. Government Fund pays Investor Services monthly a transfer
agent fee equal to $20.00 per account for the Class A shares and
$22.50 per account for the Class B shares on an annual basis, plus
out-of-pocket expenses.
CUSTODY OF PORTFOLIO
Portfolio securities of the Funds are held pursuant to a
custodian agreement between the Trust, on behalf of each Fund, and
Investors Bank and Trust ("IBT") 24 Federal Street, Boston,
Massachusetts. Under the custodian agreement, IBT performs custody,
portfolio and fund accounting services.
-39-
<PAGE> 91
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts
02116, has been selected as the independent auditors of each Fund.
The financial statements of each Fund included in its Prospectus and
this Statement of Additional Information have been audited by Ernst &
Young LLP for the periods indicated in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
-40-
<PAGE> 92
FINANCIAL STATEMENTS
F-1
<PAGE> 93
U.S. GOVERNMENT TRUST
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
March 31, 1994
FACE
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND
- -------------------
U.S. GOVERNMENT AGENCY
- ----------------------
OBLIGATIONS - 93.82%
- --------------------
FEDERAL HOME
LOAN MORTGAGE
CORPORATION - 3.89%
6.000% due 11/15/20
(Cost $944,197).................... $1,000,000 $ 921,875
FEDERAL NATIONAL MORTGAGE
ASSOCIATION - 5.53%
Pass Through Securities
6.000% with various
maturities to 12/01/23
(Cost $1,423,981).................. 1,466,770 1,313,676
GOVERNMENT
NATIONAL MORTGAGE
ASSOCIATION - 1.38%
9.500% due 10/15/19............... 14,644 15,523
12.000% due 01/15/15............... 2,686 3,052
13.000% with various
maturities to 08/15/15........... 155,359 171,610
GPMs (Graduated Payment
Mortgages)
11.250% due 04/15/14............... 6,973 7,608
15.000% with various
maturities to 10/15/12........... 33,148 37,012
15.500% with various
maturities to 11/15/11........... 83,850 93,441
-----------
TOTAL GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION
(Cost $319,658).................... 328,246
U.S. TREASURY
SECURITIES - 83.02%
Bonds
7.250% due 05/15/16............... 3,000,000 2,999,610
14.000% due 11/15/11 (A)........... 2,020,000 3,193,782
Notes
5.750% due 08/15/03............... 3,130,000 2,902,731
8.875% due 11/15/97............... 2,010,000 2,203,201
9.125% due 05/15/99............... 3,000,000 3,372,210
13.125% due 05/15/94 (B)........... 4,985,000 5,038,090
-----------
TOTAL U.S. TREASURY
SECURITIES
(Cost $21,132,840)................. 19,709,624
-----------
TOTAL U.S. GOVERNMENT
AND U.S. GOVERNMENT
AGENCY OBLIGATIONS - 93.82%
(Cost $23,820,676)................. 22,273,421
CASH AND OTHER ASSETS,
LESS LIABILITIES - 6.18% .......... 1,466,916
-----------
NET ASSETS, at value,
equivalent to $7.98 per
share for 2,973,727
shares ($.01 par value)
outstanding - 100.00% ........... $23,740,337
===========
<FN>
(A) U.S. Treasury Bonds with a value of $711,486 owned by the
Fund were designated as margin deposits for futures
contracts at March 31, 1994.
(B) Long-term obligations that will mature in less than
one year.
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 94
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1994
<S> <C> <C>
ASSETS
Investments at value (cost $23,820,676) ...................................... $22,273,421
Receivable for:
Investments sold ........................................................... $900,625
Interest ................................................................... 651,194
Shares sold ................................................................ 16,738 1,568,557
--------
Other assets ................................................................. 48,402
-----------
Total Assets ............................................................... 23,890,380
LIABILITIES
Dividends payable ............................................................ 100,026
Payable to Investment Adviser for:
Distribution expenses ...................................................... 17,345
Management fees ............................................................ 13,391
Administrative service fees ................................................ 2,498 33,234
--------
Other accrued expenses ....................................................... 10,753
Other liabilities ............................................................ 6,030
-----------
Total Liabilities .......................................................... 150,043
-----------
NET ASSETS, at value, equivalent to $7.98 per share for 2,973,727 shares
($.01 par value) outstanding ............................................... $23,740,337
===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 95
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
STATEMENT OF OPERATIONS
Year Ended March 31, 1994
<S> <C> <C>
INVESTMENT INCOME
Interest .......................... $ 1,826,992
EXPENSES
Management fees ..................... $ 143,566
Distribution expenses ............... 43,954
Administrative service fees ......... 38,604
Audit fees .......................... 20,159
Custodian fees ...................... 17,286
Registration fees ................... 15,051
Interest expense .................... 9,009
Shareholder reports ................. 8,900
Transfer agent fees ................. 8,055
Miscellaneous ....................... 6,847 311,431
----------- -----------
NET INVESTMENT INCOME ............... 1,515,561
REALIZED AND UNREALIZED
GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on:
Investments ....................... 238,292
Futures contracts ................. (32,888) 205,404
-----------
Net change in unrealized
appreciation
(depreciation) of:
Investments ....................... (1,658,290)
Futures contracts ................. 7,750 (1,650,540)
----------- -----------
NET REALIZED AND UNREALIZED
LOSS ON SECURITIES ................ (1,445,136)
-----------
INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS ........................ $ 70,425
===========
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
OPERATIONS
Net investment income ........... $ 1,515,561 $ 1,398,886
Net realized gain on
securities .................... 205,404 484,200
Net change in unrealized
appreciation
(depreciation) of
securities .................... (1,650,540) 586,962
----------- -----------
Increase in net assets
resulting from
operations .................... 70,425 2,470,048
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment
income ........................ (1,576,907) (1,664,398)
In excess of net investment
income ........................ (11,242) -
----------- -----------
Total distributions to
shareholders .................. (1,588,149) (1,664,398)
SHARE TRANSACTIONS
Increase (decrease) in
shares outstanding ............ 7,098,572 (3,829,926)
----------- -----------
Increase (decrease) in
net assets .................... 5,580,848 (3,024,276)
NET ASSETS
Beginning of year ............... 18,159,489 21,183,765
----------- -----------
End of year .................... $23,740,337 $18,159,489
=========== ===========
Undistributed Net
Investment Income ............. $ 0 $ 54,661
=========== ===========
</TABLE>
See Notes to Financial Statements.
6
<PAGE> 96
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1994 1993 1992(1) 1991 1990
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share income and capital changes
for a share outstanding during each year:
Net asset value, beginning of year ...................... $ 8.49 $ 8.16 $ 8.34 $ 8.18 $ 8.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................................... 0.58 0.61 0.87 0.90 0.89
Net realized and unrealized gain (loss) on securities ... (0.48) 0.43 (0.22) 0.11 (0.24)
------- ------- ------- -------- --------
Total from Investment Operations ...................... 0.10 1.04 0.65 1.01 0.65
LESS DISTRIBUTIONS
Dividends from net investment income .................... (0.61) (0.71) (0.83) (0.85) (0.85)
------- ------- ------- -------- --------
Net asset value, end of year ............................ $ 7.98 $ 8.49 $ 8.16 $ 8.34 $ 8.18
======= ======= ======= ======== ========
TOTAL RETURN(2) ......................................... 1.05% 13.13% 8.05% 13.04% 7.83%
======= ======= ======= ======== ========
RATIOS AND SUPPLEMENTAL DATA
Ratio of operating expenses to average net assets ....... 1.37% 1.31% 1.08% 1.13% 1.08%
Ratio of interest expense to average net assets ......... 0.04% - 0.17% - -
------- ------- ------- -------- --------
Ratio of total expenses to average net assets ........... 1.41% 1.31% 1.25% 1.13% 1.08%
Ratio of net investment income to average net assets .... 6.86% 7.07% 10.48% 10.72% 10.46%
Portfolio turnover ...................................... 264% 342% 179% 154% 244%
Net Assets, end of year (in thousands) .................. $23,740 $18,159 $21,184 $123,493 $154,472
Debt outstanding at end of year (in thousands)(3) ....... $ 0 - $ 0 - -
Average daily amount of debt outstanding during
the year (in thousands)(3) ............................ $ 341 - $ 4,172 - -
Average monthly number of shares outstanding during
the year (in thousands)................................ 2,604 - 13,081 - -
Average daily amount of debt outstanding per share
during the year(3) .................................... $ 0.13 - $ 0.32 - -
<FN>
(1) Per share information has been calculated using the average number of shares outstanding.
(2) Total return does not include the effect of the initial sales charge for years ended prior to April 1, 1993
and the contingent deferred sales charge for periods after this date.
(3) Debt outstanding consists of reverse repurchase agreements entered into during the year.
</TABLE>
See Notes to Financial Statements.
7
<PAGE> 97
NOTES TO FINANCIAL STATEMENTS
March 31, 1994
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Transamerica Bond Fund (the "Trust") is a diversified open-end management
investment company registered under the Investment Company Act of 1940, as
amended. Since November 29, 1984, the Trust has operated as a series fund,
currently issuing six series of shares. Transamerica Government Income Trust
(the "Fund") is one of the series of the Trust.
The Board of Trustees, on behalf of the Fund, is expected to approve a
change in the Fund's name to Transamerica U.S. Government Trust. In addition,
they are expected to approve and authorize the designation of all existing
issued and outstanding shares of the Fund as "Class A Shares." Class A Shares
purchased on and following the date of authorization may be subject to an
initial sales charge of up to 4.75%. The Board of Trustees is also expected to
approve and authorize the creation and issuance of an additional Class of
Shares (to be designated "Class C Shares") which will be neither subject to an
initial sales charge nor a contingent deferred sales charge, but will be
subject to a higher 12b-1 fee than Class A Shares. It is anticipated that such
shares will be offered in June, 1994.
The following is a summary of significant accounting policies
consistently followed by the Fund.
(1) Securities for which over-the-counter market quotations are readily
available are valued at the last reported bid price or at quotations provided
by market makers. Securities for which market quotations are not readily
available are valued at a fair value as determined in good faith by the Trust's
Board of Trustees. Options are valued at the last reported sale price or, if no
sales are reported, at the mean between the last reported bid and asked prices.
Short-term investments are valued at amortized cost (original cost plus
amortized discount or accrued interest).
(2) The Fund may enter into futures contracts for delayed delivery of
securities on a future date at a specified price. Initial margin deposits made
upon entering into futures contracts and options on futures contracts are
maintained by the Fund's custodian in segregated asset accounts. During the
period the futures contract is open, changes in the value of the contract are
recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract.
(3) Security transactions are accounted for on the trade date. Interest
income on investments is accrued daily. For financial reporting purposes, the
debt discounts are amortized using the straight-line method. Realized gains and
losses from security transactions are determined on the basis of identified
cost for both financial reporting and federal income tax purposes.
(4) Income dividends are declared daily by the Fund and paid or
reinvested at net asset value monthly. Other distributions are recorded on the
ex-dividend date and may be reinvested at net asset value.
Effective April 1, 1993, the Fund adopted Statement of Position
93-2,"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gains, and Return of Capital Distributions by Investment
Companies." As a result of this statement, the Fund changed the classification
of distributions to shareholders to better disclose the differences between
financial statement amounts and distributions determined and reported in
accordance with income tax regulations. Accordingly, the Fund reclassified
$8,965 and $15,311 to undistributed net investment income and undistributed net
realized losses, respectively, from additional paid-in capital. Net investment
income, net realized losses and net assets were not affected by this change.
(5) No provision for federal income taxes has been made since it is the
Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code.
The Fund's tax year end is December 31. For federal income tax
purposes, at December 31, 1993, the Fund had an accumulated net realized
capital loss carryforward of ap- proximately $51,005,000. The loss carryforward
will expire as follows: $39,800,000 - 1996, $2,986,000 - 1997, $5,413,000 -
1998, $654,000 - 1999 and $2,152,000 - 2000.
(6) The Fund reports custodian fees net of credits and charges
resulting from cash positions in the custodial accounts greater than or less
than the amounts required to settle portfolio transactions. For the year ended
March 31, 1994, these amounts were $4,178 and $3,914, respectively.
8
<PAGE> 98
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE A (Continued)
(7) With respect to U.S. government and U.S. government agency
securities in which the Fund may invest, only U.S. Treasury and Government
National Mortgage Association (GNMA) issues are backed by the full faith and
credit of the U.S. government. All other government issues are backed by the
issuing agencies and their general ability to borrow from the U.S. government.
Options and futures contracts on U.S. government securities are not issues of,
nor guaranteed by the U.S. government or its agencies.
<TABLE>
NOTE B - MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund's management fee is payable monthly to Transamerica Fund Management
Company (the "Investment Adviser"). The management fee is calculated based on
the following schedule:
<CAPTION>
AVERAGE DAILY NET ASSETS ANNUAL RATE
------------------------ -----------
<S> <C>
First $200 million 0.650%
Next $300 million 0.625%
Over $500 million 0.600%
</TABLE>
The Investment Adviser provides administrative services to the Fund
pursuant to an administrative service agreement. During the year ended March 31,
1994, the Fund paid or accrued $28,654 to the Investment Adviser for these
services.
During the year ended March 31, 1994, Transamerica Fund Distributors,
Inc. (the "Distributor"), an affiliate of the Investment Adviser, as principal
underwriter, retained $172 as its portion of the commissions charged on sales of
shares of the Fund.
The Fund paid no compensation directly to any officer. Certain officers
and a trustee of the Trust are affiliated with the Investment Adviser.
During the year ended March 31, 1994, the Fund paid legal fees of
$1,472 to Baker & Botts. A partner with Baker & Botts is an officer of the
Trust.
NOTE C - COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended March 31, 1994, purchases and sales of securities other
than short-term obligations, aggregated $62,686,435 and $57,173,866,
respectively.
At March 31, 1994, the identified cost of total investments owned is
the same for both financial reporting and federal income tax purposes. At March
31, 1994, the gross unrealized appreciation and gross unrealized depreciation of
investments and futures contracts for federal income tax purposes were $22,338
and $1,555,843, respectively.
<TABLE>
Futures contracts which were open at March 31, 1994, were as follows:
<CAPTION>
DELIVERY NUMBER OF UNREALIZED
MONTH/YEAR/COMMITMENT CONTRACTS(1) APPRECIATION
- --------------------- ------------ ------------
<S> <C> <C>
U.S. Treasury Bond Futures
Jun/94/short ................. 5 $12,344
U.S. Treasury Ten Year
Note Futures
Jun/94/short ................. 1 1,406
- -------
6 $13,750
= =======
<FN>
(1) Each contract represents $100,000 in par value.
</TABLE>
NOTE D - PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized to finance activities related to the distribution of its shares. The
distribution plan, together with the contingent deferred sales charge, complies
with the regulations covering maximum sales charges assessed by mutual funds
distributed through securities dealers that are NASD members. The plan permits
the Fund to make payments to the Distributor up to 0.25% annually of average
daily net assets for certain distribution costs such as service fees paid to
dealers, production and distribution of prospectuses to prospective investors,
services provided to new and existing shareholders and other distribution
related activities. During the year ended March 31, 1994, the Fund made payments
to the Distributor of $43,954 related to the above activities.
9
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS
Continued
<TABLE>
NOTE E - SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1994 1993
---------------------- -----------------------
SHARES DOLLARS SHARES DOLLARS
--------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold ........................................ 1,260,831 $10,724,985 21,624 179,919
Shares issued in reinvestment of distributions ..... 51,515 433,356 48,054 403,082
Shares redeemed .................................... (478,553) (4,059,769) (524,596) (4,412,927)
--------- ----------- -------- -----------
Net increase (decrease) in shares outstanding ...... 833,793 7,098,572 (454,918) $(3,829,926)
========= =========== ======== ===========
<FN>
The components of net assets at March 31, 1994, are as follows:
Capital paid-in (unlimited number of shares authorized) ................................ $ 76,592,907
Accumulated net realized loss on investments and futures contracts ..................... (51,319,065)
Net unrealized depreciation of investments and futures contracts ....................... (1,533,505)
------------
NET ASSETS ............................................................................. $ 23,740,337
============
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
Transamerica Government Income Trust,
a series of Transamerica Bond Fund
We have audited the accompanying statement of assets and liabilities of
Transamerica Government Income Trust, a series of Transamerica Bond Fund,
including the schedule of investments, as of March 31, 1994, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Transamerica Government Income Trust, a series of Transamerica Bond
Fund, at March 31, 1994, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG
Houston, Texas
April 29, 1994
10
<PAGE> 100
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
John Hancock Government Income Trust,
a series of John Hancock Bond Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Government Income Trust, formerly Transamerica Government Income Trust,
a series of John Hancock Bond Fund, formerly Transamerica Bond Fund, including
the schedule of investments, as of March 31, 1994, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights
for each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of March 31, 1994, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of John
Hancock Government Income Trust, a series of John Hancock Bond Fund at March
31, 1994, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the indicated periods, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
<PAGE> 101
INTERMEDIATE GOVERNMENT FUND
<TABLE>
STATEMENT OF NET ASSETS
March 31, 1994
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT
- ---------------
OBLIGATIONS - 84.82%
- ----------------------
U.S. TREASURY
SECURITIES - 84.82%
Bonds
11.125% due 08/15/03 ............... $3,550,000 $4,605,805
Notes
8.125% due 02/15/98 ............... 250,000 268,583
8.875% due 11/15/97 ............... 500,000 548,060
9.375% due 04/15/96 ............... 2,630,000 2,838,401
----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS
(Cost $8,694,483) .................. 8,260,849
SHORT-TERM
- ----------
OBLIGATIONS - 13.39%
- ----------------------
U.S. GOVERNMENT AGENCY
- ----------------------
OBLIGATIONS - 13.39%
- ----------------------
Federal Farm Credit Bank
3.500% due 04/07/94 to
04/12/94 ........................ 790,000 789,454
3.600% due 04/04/94 ............... 415,000 414,875
Federal Home Loan Bank
3.520% due 04/04/94 ............... 100,000 99,971
----------
TOTAL SHORT-TERM
OBLIGATIONS
(Cost 1,304,300) ................... 1,304,300
----------
TOTAL INVESTMENTS - 98.21%
(Cost $9,998,783) .................. 9,565,149
CASH AND OTHER ASSETS,
LESS LIABILITIES - 1.79% ........ 174,431
----------
NET ASSETS, at value,
equivalent to $9.68 per
share for 1,005,734 shares
($.01 par value)
outstanding - 100.00% ........... $9,739,580
==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 102
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
STATEMENT OF OPERATIONS
Year Ended March 31, 1994
<S> <C> <C>
INVESTMENT INCOME
Interest ....................... $ 360,360
EXPENSES
Administrative service fees .... $ 28,021
Management fees ................ 24,447
Audit fees ..................... 14,721
Registration fees .............. 13,982
Shareholder reports ............ 8,929
Transfer agent fees ............ 4,638
Custodian fees ................. 3,817
Legal fees ..................... 562
Miscellaneous .................. 361
Less: Expense reimbursement .... (36,242) 63,236
-------- ---------
NET INVESTMENT INCOME ........ 297,124
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized loss on
investments .................. (69,892)
Net change in unrealized
depreciation of investments .. (448,620)
---------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS .......... (518,512)
---------
DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS .... $(221,388)
=========
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1994 1993
---------- ----------
<S> <C> <C>
OPERATIONS
Net investment income ....... $ 297,124 $ 82,531
Net realized gain (loss)
on investments ............ (69,892) 42,668
Net change in unrealized
appreciation
(depreciation) of
investments ............... (448,620) 10,919
---------- ----------
Increase (decrease) in net
assets resulting from
operations ................ (221,388) 136,118
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income ....... (297,773) (84,637)
SHARE TRANSACTIONS
Increase in shares
outstanding ............... 8,764,243 29,331
---------- ----------
Increase in net assets ...... 8,245,082 80,812
NET ASSETS
Beginning of year ........... 1,494,498 1,413,686
---------- ----------
End of year ................. 9,739,580 1,494,498
========== ==========
Undistributed Net
Investment Income ......... 340 0
========== ==========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 103
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Year Ended March 31,
--------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Per share income and capital changes
for a share outstanding during each year:
Net asset value, beginning of year......................... $10.23 $ 9.84 $ 9.62 $ 9.45 $ 9.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income...................................... 0.63 0.57 0.70 0.78 0.86
Net realized and unrealized gain (loss) on investments..... (0.54) 0.40 0.23 0.17 0.08
------ ------ ------ ------ ------
Total from Investment Operations......................... 0.09 0.97 0.93 0.95 0.94
LESS DISTRIBUTIONS
Dividends from net investment income....................... (0.64) (0.58) (0.71) (0.78) (0.87)
------ ------ ------ ------ ------
Net asset value, end of year............................... $ 9.68 $10.23 $ 9.84 $ 9.62 $ 9.45
====== ====== ====== ====== ======
TOTAL RETURN (1)........................................... 0.73% 10.13% 9.89% 10.47% 10.32%
====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net assets.................... 2.04% 3.25% 4.01% 2.63% 1.96%
Ratio of expense reimbursement to average net assets....... (0.74)% (2.80)% (3.50)% (2.03)% (1.44)%
------ ------ ------ ------ ------
Ratio of net expenses to average net assets................ 1.30% 0.45% 0.51% 0.60% 0.52%
====== ====== ====== ====== ======
Ratio of net investment income to average net assets....... 6.08% 5.64% 7.12% 8.41% 9.16%
Portfolio turnover......................................... 89% 73% 169% 97% 19%
Net Assets, end of year (in thousands)..................... $9,740 $1,494 $1,414 $1,537 $2,655
<FN>
(1) Total return does not include the effect of the initial sales charge for years ended prior to April 1, 1993
and the contingent deferred sales charge for the periods after this date.
</TABLE>
See Notes to Financial Statements.
6
<PAGE> 104
NOTES TO FINANCIAL STATEMENTS
March 31, 1994
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Transamerica Bond Fund (the "Trust") is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended. Since November 29, 1984, the Trust has operated as a series fund,
currently issuing six series of shares. Transamerica Intermediate Government
Trust (the "Fund"), formerly named Transamerica Premium Limited Term Account,
is one of the series of the Trust. On April 15, 1994, the Board of Trustees
approved, subject to shareholder ratification, a change in the fundamental
investment policies of the Fund in order to permit the Fund to invest in
securities having a dollar weighted average portfolio maturity of between one
and ten years.
The Board of Trustees, on behalf of the Fund, is expected to approve and
authorize the designation of all existing issued and outstanding shares of the
Fund as "Class A Shares." Class A Shares purchased on and following the date of
authorization may be subject to an initial sales charge of up to 4.75%. The
Board of Trustees is also expected to approve and authorize the creation and
issuance of an additional Class of Shares (to be designated "Class C Shares")
which will be neither subject to an initial sales charge nor a contingent
deferred sales charge, but will be subject to a higher 12b-1 fee than Class A
Shares. It is anticipated that such shares will be offered in June, 1994.
The following is a summary of significant accounting policies
consistently followed by the Fund.
(1) Securities for which over-the-counter market quotations are readily
available are valued at the last reported bid price or at quotations provided by
market makers. Securities for which market quotations are not readily available
are valued at a fair value as determined in good faith by the Trust's Board of
Trustees. Short-term investments are valued at amortized cost (original cost
plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date. Interest
income on investments is accrued daily. Realized gains and losses from security
transactions are determined on the basis of identified cost for both financial
reporting and federal income tax purposes. For financial reporting purposes,
debt discounts are amortized using the yield-to-maturity method.
(3) Income dividends are declared daily by the Fund and paid or
reinvested at net asset value monthly. Other distributions are recorded on the
ex-dividend date and may be reinvested at net asset value. Distributions
payable to shareholders at March 31, 1994 were $18,144.
Effective April 1, 1993, the Fund adopted Statement of Position 93-2,
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gains, and Return of Capital Distributions by Investment Companies." As
a result of this statement, the Fund changed the classification of distributions
to shareholders to better disclose the differences between financial statement
amounts and distributions determined and reported in accordance with income tax
regulations. Accordingly, the Fund reclassified $4,018 and $19 to undistributed
net investment income and undistributed net realized losses, respectively, from
additional paid-in capital. Net investment income, net realized losses, and net
assets were not affected by this change.
(4) No provision for federal income taxes has been made since it is the
Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code.
The Fund's tax year end is December 31. For federal income tax
purposes, at December 31, 1993, the Fund had an accumulated net realized
capital loss carryforward of $29,000, which will expire in 1997.
(5) With respect to U.S. government and U.S. government agency
securities in which the Fund may invest, only U.S. Treasury and Government
National Mortgage Association (GNMA) issues are backed by the full faith and
credit of the U.S. government. All other government issues are backed by the
issuing agencies and their general ability to borrow from the U.S. government.
NOTE B - MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund's management fee is payable monthly to Transamerica Fund
Management Company the "Investment Adviser") and is calculated at an annual rate
of 0.50% of the average daily net assets of the Fund. At March 31, 1994, the
management fee payable to the Investment Adviser was $2,625.
The Investment Adviser voluntarily agreed to reimburse the Fund for all
normal operating expenses which exceed an annual rate of 1.30% of the Fund's
average daily net assets until June 30, 1994. For the year ended March 31, 1994,
the Investment Adviser reimbursed the Fund $36,242 pursuant to this agreement.
7
<PAGE> 105
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE B (Continued)
The Investment Adviser also provides administrative services to the Fund
pursuant to an administrative service agreement. During the year ended March 31,
1994, the Fund paid or accrued $24,751 to the Investment Adviser for these
services, of which $2,409 was payable at March 31, 1994.
Transamerica Fund Distributors, Inc. (the "Distributor"), an affiliate
of the Investment Adviser, is the principal underwriter of the Fund. At March
31, 1994, receivables from and payables to the Distributor for Fund share
transactions were $125,008 and $79,573, respectively.
The Fund paid no compensation directly to any officer. Certain officers
and a trustee of the Trust are affiliated with the Investment Adviser. In
addition, a partner with Baker & Botts is an officer of the Trust.
NOTE C - COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended March 31, 1994, purchases and sales of securities, other
than short-term obligations, aggregated $11,748,141 and $3,934,300,
respectively.
At March 31, 1994, the identified cost of investments owned is the same
for both financial reporting and federal income tax purposes. At March 31, 1994,
the gross unrealized appreciation and gross unrealized depreciation of
investments for federal income tax purposes were $0 and $433,634, respectively.
NOTE D - PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized to finance activities related to the distribution of its shares. The
distribution plan, together with the contingent deferred sales charge, complies
with the regulations covering maximum sales charges assessed by mutual funds
distributed through securities dealers that are NASD members. The plan permits
the Fund to make payments to the Distributor up to 0.25% annually of average
daily net assets for certain distribution costs such as service fees paid to
dealers, production and distribution of prospectuses to prospective investors,
services provided to new and existing shareholders and other distribution
related activities. During the year ended March 31, 1994, no distribution
expenses were paid by the Fund.
-----------------------------------------
<TABLE>
NOTE E - SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1994 1993
------------------------ -------------------
SHARES DOLLARS SHARES DOLLARS
--------- ----------- ------- ---------
<S> <C> <C> <C> <C>
Shares sold ........................................... 1,005,687 $10,251,058 70,273 $ 712,438
Shares issued in reinvestment of distributions ........ 20,007 201,939 8,040 80,848
Shares redeemed ....................................... (166,042) (1,688,754) (75,870) (763,955)
--------- ----------- ------- ---------
Net increase in shares outstanding .................... 859,652 $ 8,764,243 2,443 $ 29,331
========= =========== ======= =========
<FN>
The components of net assets at March 31, 1994, are as follows:
Capital paid-in (unlimited number of shares authorized) ..................................... $10,288,973
Undistributed net investment income ......................................................... 340
Accumulated net realized loss on investments ................................................ (116,099)
Net unrealized depreciation of investments .................................................. (433,634)
-----------
NET ASSETS .................................................................................. $ 9,739,580
===========
</TABLE>
8
<PAGE> 106
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
Transamerica Intermediate Government Trust,
a series of Transamerica Bond Fund
We have audited the accompanying statement of net assets of Transamerica
Intermediate Government Trust (formerly, Premium Limited Term Account), a series
of Transamerica Bond Fund, as of March 31, 1994, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Transamerica Intermediate Government Trust, a series of Transamerica
Bond Fund, at March 31, 1994, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG
Houston, Texas
April 29, 1994
9
<PAGE> 107
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
John Hancock Intermediate Government Trust,
a series of John Hancock Bond Fund
We have audited the accompanying statement of net assets of John Hancock
Intermediate Government Trust, formerly Transamerica Intermediate Government
Trust, a series of John Hancock Bond Fund, formerly Transamerica Bond Fund, as
of March 31, 1994, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of March 31, 1994, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of John
Hancock Intermediate Government Trust, a series of John Hancock Bond Fund, at
March 31, 1994, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the indicated periods, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
<PAGE> 108
U.S. GOVERNMENT TRUST
STATEMENT OF NET ASSETS
UNAUDITED
September 30, 1994
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY OBLIGATIONS - 106.13%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 66.54%
7.000% due 05/15/24........................................................................... $1,558,542 $ 1,409,506
7.500% with various maturities to 05/15/24.................................................... 2,519,476 2,362,009
8.000% due 05/15/24........................................................................... 2,472,639 2,391,506
8.500% due 05/15/24........................................................................... 3,510,849 3,496,587
9.000% with various maturities to 06/15/17.................................................... 4,210,709 4,306,767
9.500% due 10/15/19........................................................................... 10,923 11,466
12.000% due 01/15/15.......................................................................... 810 912
13.000% with various maturities to 08/15/15................................................... 128,321 140,112
GPMs (Graduated Payment Mortgages)
15.000% with various maturities to 09/15/12................................................... 6,523 7,204
15.500% with various maturities to 11/15/11................................................... 83,387 91,908
-----------
14,217,977
U.S. TREASURY BONDS - 39.59%
12.625% due 05/15/95(A)....................................................................... 8,100,000 8,459,640
-----------
TOTAL U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $23,072,980)............................................................................ 22,677,617
SHORT-TERM OBLIGATIONS - 2.07%
REPURCHASE AGREEMENT - 2.07%
Texas Commerce Bank 4.250% due 10/03/94 (dated 09/30/94). Collateralized by $450,192 value,
U.S. Treasury Note 5.500% due 04/30/96. (Repurchase proceeds $441,156)
(Cost $441,052)............................................................................... 441,000 441,052
-----------
TOTAL INVESTMENTS - 108.20%
(Cost $23,514,032)............................................................................ 23,118,669
CASH AND OTHER ASSETS, LESS LIABILITIES - (8.20)%............................................. (1,751,815)
NET ASSETS, at value, equivalent to $7.61 per share for 2,809,181 shares
($.01 par value) outstanding - 100.00%...................................................... $21,366,854
===========
</TABLE>
(A) Long-term obligations that will mature in less than one year.
See Notes to Financial Statements.
4
<PAGE> 109
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
UNAUDITED
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six Months Ended September 30, 1994
<S> <C> <C>
INVESTMENT INCOME
Interest.......................................... $ 982,894
EXPENSES
Management fees................................... $ 72,124
Distribution expenses............................. 25,212
Administrative service fees....................... 21,215
Interest expense.................................. 13,863
Registration fees................................. 11,928
Audit fees........................................ 10,797
Custodian fees.................................... 10,552
Transfer agent fees............................... 6,868
Shareholder reports............................... 5,196
Miscellaneous..................................... 3,536 181,291
----------- -----------
NET INVESTMENT INCOME 801,603
REALIZED AND UNREALIZED
GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on:
Investments..................................... (2,206,298)
Futures contracts............................... 17,960 (2,188,338)
-----------
Net change in unrealized
appreciation
(depreciation) of:
Investments..................................... 1,151,892
Futures contracts............................... (13,750) 1,138,142
----------- -----------
NET REALIZED AND
UNREALIZED LOSS ON
SECURITIES...................................... (1,050,196)
-----------
DECREASE IN NET ASSETS
RESULTING FROM
OPERATIONS...................................... $ (248,593)
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, MARCH 31,
1994 1994
------------- -----------
<S> <C> <C>
OPERATIONS
Net investment income............................... $ 801,603 $ 1,515,561
Net realized gain (loss) on
securities........................................ (2,188,338) 205,404
Net change in unrealized
appreciation (depreciation)
of securities..................................... 1,138,142 (1,650,540)
----------- -----------
Increase (decrease) in net
assets resulting from
operations........................................ (248,593) 70,425
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment
income............................................ (801,603) (1,576,907)
In excess of net investment
income............................................ (40,072) (11,242)
----------- -----------
Total distributions to
shareholders...................................... (841,675) (1,588,149)
SHARE TRANSACTIONS
Increase (decrease) in shares
outstanding....................................... (1,283,215) 7,098,572
----------- -----------
Increase (decrease) in
net assets........................................ (2,373,483) 5,580,848
NET ASSETS
Beginning of period................................. 23,740,337 18,159,489
----------- -----------
End of period....................................... $21,366,854 $23,740,337
=========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 110
FINANCIAL HIGHLIGHTS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, --------------------------------------------------
1994(1) 1994 1993 1992(2) 1991 1990
------------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Per share income and capital changes for a share
outstanding during each period:
Net asset value, beginning of period.............................. $ 7.98 $ 8.49 $ 8.16 $ 8.34 $ 8.18 $ 8.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................. 0.28 0.58 0.61 0.87 0.90 0.89
Net realized and unrealized gain (loss) on securities............. (0.36) (0.48) 0.43 (0.22) 0.11 (0.24)
------- ------- ------- ------- -------- --------
Total from Investment Operations................................ (0.08) 0.10 1.04 0.65 1.01 0.65
LESS DISTRIBUTIONS
Dividends from net investment income.............................. (0.28) (0.61) (0.71) (0.83) (0.85) (0.85)
Dividends in excess of net investment income...................... (0.01) - - - - -
------- ------- ------- ------- -------- --------
Total Distributions............................................. (0.29) (0.61) (0.71) (0.83) (0.85) (0.85)
------- ------- ------- ------- -------- --------
Net asset value, end of period.................................... $ 7.61 $ 7.98 $ 8.49 $ 8.16 $ 8.34 $ 8.18
======= ======= ======= ======= ======== ========
TOTAL RETURN(3)................................................... (0.94)% 1.05% 13.13% 8.05% 13.04% 7.83%
======= ======= ======= ======= ======== ========
RATIOS AND SUPPLEMENTAL DATA
Ratio of operating expenses to average net assets................. 0.76% 1.37% 1.31% 1.08% 1.13% 1.08%
Ratio of interest expense to average net assets................... 0.06% 0.04% - 0.17% - -
------- ------- ------- ------- -------- --------
Ratio of total expenses to average net assets..................... 0.82% 1.41% 1.31% 1.25% 1.13% 1.08%
Ratio of net investment income to average net assets.............. 3.62% 6.86% 7.07% 10.48% 10.72% 10.46%
Portfolio turnover................................................ 255% 264% 342% 179% 154% 244%
Net Assets, end of period (in thousands).......................... $21,367 $23,740 $18,159 $21,184 $123,493 $154,472
Debt outstanding at end of period (in thousands)(4)............... $ 0 $ 0 - $ 0 - -
Average daily amount of debt outstanding during the
period (in thousands) (4)....................................... $ 739 $ 341 - $ 4,172 - -
Average monthly number of shares outstanding during
the period (in thousands)....................................... 2,849 2,604 - 13,081 - -
Average daily amount of debt outstanding per share during
the period (4).................................................. $ 0.26 $ 0.13 - $ 0.32 - -
</TABLE>
(1) Financial highlights, including total return, have not been annualized.
(2) Per share information has been calculated using the average number of shares
outstanding.
(3) Total return does not include the effect of the initial sales charge.
(4) Debt outstanding consists of reverse repurchase agreements entered into
during the period.
See Notes to Financial Statements.
6
<PAGE> 111
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
September 30, 1994
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Transamerica Bond Fund (the ``Trust'') is a diversified open-end management
investment company registered under the Investment Company Act of 1940, as
amended. Since November 29, 1984, the Trust has operated as a series fund,
currently issuing six series of shares. Transamerica U.S. Government Trust (the
``Fund''), formerly Transamerica Government Income Trust, is one of the series
of the Trust.
On February 15, 1994, the Board of Trustees, on behalf of the Fund,
approved and authorized, effective May 1, 1994, the designation of all existing
issued and outstanding shares of the Fund as ``Class A Shares.'' Class A Shares
purchased on and following the effective date are subject to an initial sales
charge of up to 4.75% and a 12b-1 distribution plan. On September 30, 1994, the
Fund commenced issuing a second class of shares. The new Class B Shares are
subject to a contingent deferred sales charge and a separate 12b-1 distribution
plan. There were no Class B Shares issued to the public during the six months
ended September 30, 1994; therefore, all information in this report refers to
the Class A Shares only. The following is a summary of significant accounting
policies consistently followed by the Fund.
(1) Securities for which over-the-counter market quotations are readily
available are valued at the last reported bid price or at quotations provided by
market makers. Interest rate futures contracts and options on interest rate
futures are valued based on their daily settlement price. Securities for which
market quotations are not readily available are valued at a fair value as
determined in good faith by the Trust's Board of Trustees. Short-term
investments are valued at amortized cost (original cost plus amortized discount
or accrued interest).
(2) The Fund may enter into futures contracts for delayed delivery of
securities on a future date at a specified price. Initial margin deposits made
upon entering into futures contracts and options on futures contracts are
maintained by the Fund's custodian in segregated asset accounts. During the
period the futures contract is open, changes in the value of the contract are
recognized as unrealized gains or losses by ``marking to market'' on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made, depending upon whether
unrealized gains or losses are incurred. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the proceeds
from (or cost of) the closing transaction and the Fund's basis in the contract.
(3) The Fund may enter into reverse repurchase agreements which involve
the sale of securities held by the Fund to a bank or securities firm with an
agreement that the Fund will buy back the securities at a fixed future date at a
fixed price plus an agreed amount of ``interest'' which may be reflected in the
repurchase price. Reverse repurchase agreements are considered to be borrowings
by the Fund and the Fund will use the proceeds obtained from the sale of
securities to purchase other investments.
(4) Security transactions are accounted for on the trade date. Interest
income on investments is accrued daily. For financial reporting purposes, the
debt discounts are amortized using the straight-line method. Realized gains and
losses from security transactions are determined on the basis of identified cost
for both financial reporting and federal income tax purposes.
(5) Income dividends are declared daily by the Fund and paid or reinvested
at net asset value monthly. Other distributions are recorded on the ex-dividend
date and may be reinvested at net asset value. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Distributions payable to
shareholders at September 30, 1994 were $94,701.
(6) No provision for federal income taxes has been made since it is the
Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code.
The Fund's tax year end is December 31. For federal income tax purposes,
at December 31, 1993, the Fund had an accumulated net realized capital loss
carryforward of approximately $51,005,000. The loss carryforward will expire as
follows: $39,800,000 - 1996, $2,986,000 - 1997, $5,413,000 - 1998, $654,000 -
1999 and $2,152,000 - 2000.
(7) The Fund reports custodian fees net of credits and charges resulting
from cash positions in the custodial accounts greater than or less than the
amounts required to settle portfolio transactions. For the six months ended
September 30, 1994, these amounts were $3,397 and $3,534, respectively.
(8) With respect to U.S. government and U.S. government agency securities
`in which the Fund may invest, only U.S. Treasury and Government National
Mortgage Association (GNMA) issues are backed by the full faith and credit of
the U.S. government. All other government issues are backed by the issuing
agencies and their general ability to borrow from the U.S. government. Options
and futures contracts on U.S. government securities are not issues of, nor
guaranteed by the U.S. government or its agencies.
7
<PAGE> 112
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
Continued
NOTE B - MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund's management fee is payable monthly to Transamerica Fund Management
Company (TFMC). The management fee is calculated based on the following
schedule:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS ANNUAL RATE
------------------------ -----------
<S> <C>
First $200 million 0.650%
Next $300 million 0.625%
Over $500 million 0.600%
</TABLE>
At September 30, 1994, the management fee payable to TFMC was $11,494.
TFMC provides administrative services to the Fund pursuant to an
administrative service agreement. During the six months ended September 30,
1994, the Fund paid or accrued $15,681 to TFMC for these services, of which
$2,811 was payable at September 30, 1994.
During the six months ended September 30, 1994, Transamerica Fund
Distributors, Inc. (the ``Distributor''), an affiliate of TFMC, as principal
underwriter, retained $2,180 as its portion of the commissions charged on sales
of shares of the Fund. At September 30, 1994, receivables from and payables to
the Distributor for Fund share transactions were $9,526 and $18,504,
respectively.
The Fund paid no compensation directly to any officer. Certain officers and
a trustee of the Trust are affiliated with TFMC.
During the six months ended September 30, 1994, the Fund paid legal fees of
$880 to Baker & Botts. A partner with Baker & Botts is an officer of the Trust.
NOTE C - COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the six months ended September 30, 1994, purchases and sales of
securities, other than short-term obligations, aggregated $60,208,006 and
$58,756,953, respectively. At September 30, 1994, payables to brokers for
securities purchased were $2,067,000.
At September 30, 1994, the identified cost of total investments owned is
the same for both financial reporting and federal income tax purposes. At
September 30, 1994, the gross unrealized appreciation and gross unrealized
depreciation of investments for federal income tax purposes were $3,211 and
$398,574, respectively.
NOTE D - PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized to finance activities related to the distribution of its shares. The
distribution plan, together with the initial sales charge on shares sold,
complies with the regulations covering maximum sales charges assessed by mutual
funds distributed through securities dealers that are NASD members. The plan
permits the Fund to make payments to the Distributor up to 0.25% annually of
average daily net assets for certain distribution costs such as service fees
paid to dealers, production and distribution of prospectuses to prospective
investors, services provided to new and existing shareholders and other
distribution related activities. During the six months ended September 30, 1994,
the Fund made payments to the Distributor of $25,212 related to the above
activities, of which $13,576 was payable at September 30, 1994.
8
<PAGE> 113
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
Continued
NOTE E - SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1994 MARCH 31, 1994
-------------------------- ------------------------
SHARES DOLLARS SHARES DOLLARS
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold.......................................................... 216,408 $ 1,686,038 1,260,831 $10,724,985
Shares issued in reinvestment of distributions....................... 32,931 255,334 51,515 433,356
Shares redeemed...................................................... (413,885) (3,224,587) (478,553) (4,059,769)
-------- ----------- --------- -----------
Net increase (decrease) in shares outstanding........................ (164,546) $(1,283,215) 833,793 $ 7,098,572
======== =========== ========= ===========
</TABLE>
The components of net assets at September 30, 1994, are as follows:
<TABLE>
<S> <C>
Capital paid-in (unlimited number of shares authorized)............................................................. $75,269,620
Accumulated net realized loss on investments and futures contracts.................................................. (53,507,403)
Net unrealized depreciation of investments.......................................................................... (395,363)
-----------
NET ASSETS.......................................................................................................... $21,366,854
===========
</TABLE>
9
<PAGE> 114
INTERMEDIATE GOVERNMENT FUND
STATEMENT OF NET ASSETS
UNAUDITED
September 30, 1994
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY OBLIGATIONS - 86.68%
- -------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 16.51%
8.500% due 08/01/24 ....................................................... $1,529,999 $1,525,457
U.S. TREASURY SECURITIES - 70.17%
BONDS
11.125% due 08/15/03 ....................................................... 2,410,000 2,953,841
Notes
8.125% due 02/15/98 ....................................................... 250,000 258,270
8.875% due 11/15/97 ....................................................... 500,000 526,915
9.375% due 04/15/96 ....................................................... 2,630,000 2,744,773
----------
6,483,799
----------
TOTAL LONG-TERM U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $8,365,248)........................................................... 8,009,256
SHORT-TERM U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.30%
- --------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.22%
4.500% due 10/03/94 ....................................................... 495,000 494,876
4.720% due 10/05/94 ....................................................... 265,000 264,861
----------
759,737
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.08%
4.820% due 10/14/94 ....................................................... 285,000 284,504
----------
TOTAL SHORT-TERM U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $1,044,241) .......................................................... 1,044,241
----------
TOTAL INVESTMENTS - 97.98%
(Cost $9,409,489) .......................................................... 9,053,497
CASH AND OTHER ASSETS, LESS LIABILITIES - 2.02% .......................... 187,083
----------
NET ASSETS, at value, equivalent to $9.27 per share for 997,176 shares
($.01 par value) outstanding - 100.00% .................................... $9,240,580
==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 115
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
UNAUDITED
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six Months Ended September 30, 1994
<S> <C> <C>
INVESTMENT INCOME
Interest................................ $ 385,759
EXPENSES
Management fees......................... $ 24,460
Registration fees....................... 16,971
Administrative service fees............. 16,848
Shareholder reports..................... 7,699
Audit fees.............................. 5,768
Transfer agent fees..................... 5,681
Custodian fees.......................... 3,506
Miscellaneous........................... 1,635
Less: Expense reimbursement............. (18,924) 63,644
-------- ---------
NET INVESTMENT INCOME................. 322,115
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments........ (504,727)
Net change in unrealized
depreciation of investments........... 77,642
---------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS........................ (427,085)
---------
DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS....................... $(104,970)
=========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, MARCH 31,
1994 1994
------------ -----------
<S> <C> <C>
OPERATIONS
Net investment income........... $ 322,115 $ 297,124
Net realized loss on
investments................... (504,727) (69,892)
Net change in unrealized
depreciation of
investments................... 77,642 (448,620)
---------- ----------
Decrease in net assets
resulting from operations..... (104,970) (221,388)
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income........... (323,063) (297,773)
SHARE TRANSACTIONS
Increase (decrease) in shares
outstanding................... (70,967) 8,764,243
---------- ----------
Increase (decrease) in
net assets.................... (499,000) 8,245,082
NET ASSETS
Beginning of period............. 9,739,580 1,494,498
---------- ----------
End of period................... $9,240,580 $9,739,580
========== ==========
Undistributed Net Investment
Income........................ $ 0 $ 340
========== ==========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 116
FINANCIAL HIGHLIGHTS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, ----------------------------------------------------
1994(1) 1994 1993 1992 1991 1990
------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per share income and capital changes for a share outstanding
during each period:
Net asset value, beginning of period........................ $ 9.68 $10.23 $ 9.84 $ 9.62 $ 9.45 $ 9.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................................... 0.31 0.63 0.57 0.70 0.78 0.86
Net realized and unrealized gain (loss) on investments...... (0.41) (0.54) 0.40 0.23 0.17 0.08
------ ------ ------ ------ ------ ------
Total from Investment Operations.......................... (0.10) 0.09 0.97 0.93 0.95 0.94
LESS DISTRIBUTIONS
Dividends from net investment income........................ (0.31) (0.64) (0.58) (0.71) (0.78) (0.87)
------ ------ ------ ------ ------ ------
Net asset value, end of period.............................. $ 9.27 $ 9.68 $10.23 $ 9.84 $ 9.62 $ 9.45
====== ====== ====== ====== ====== ======
TOTAL RETURN(2)............................................. (1.01)% 0.73% 10.13% 9.89% 10.47% 10.32%
====== ====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net assets..................... 0.84% 2.04% 3.25% 4.01% 2.63% 1.96%
Ratio of expense reimbursement to average net assets........ (0.19)% (0.74)% (2.80)% (3.50)% (2.03)% (1.44)%
------ ------ ------ ------ ------ ------
Ratio of net expenses to average net assets................. 0.65% 1.30% 0.45% 0.51% 0.60% 0.52%
====== ====== ====== ====== ====== ======
Ratio of net investment income to average net assets........ 3.30% 6.08% 5.64% 7.12% 8.41% 9.16%
Portfolio turnover 65% 89% 73% 169% 97% 19%
Net Assets, end of period (in thousands).................... $9,241 $9,740 $1,494 $1,414 $1,537 $ 2,655
</TABLE>
(1) Financial highlights, including total return, have not been annualized.
(2) Total return does not include the effect of the initial sales charge.
See Notes to Financial Statements.
6
<PAGE> 117
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
September 30, 1994
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Transamerica Bond Fund (the "Trust") is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended. Since November 29, 1984, the Trust has operated as a series fund,
currently issuing six series of shares. Transamerica Intermediate Government
Trust (the "Fund") is one of the series of the Trust. On April 15, 1994, the
Board of Trustees approved and the shareholders subsequently ratified a change
in the fundamental investment policies of the Fund in order to permit the Fund
to invest in securities having a dollar weighted average portfolio maturity of
between one and ten years.
In addition, on February 15, 1994, the Board of Trustees, on behalf of the
Fund, approved and authorized, effective May 1, 1994, the designation of all
existing issued and outstanding shares of the Fund as "Class A Shares." Class
A Shares purchased on and following the effective date are subject to an initial
sales charge of up to 4.75% and a 12b-1 distribution plan. On September 30,
1994, the Fund commenced issuing a second class of shares. The new Class B
Shares are subject to a contingent deferred sales charge and a separate 12b-1
distribution plan. There were no Class B Shares issued to the public during the
six months ended September 30, 1994; therefore, all information in this report
refers to the Class A Shares only. The following is a summary of significant
accounting policies consistently followed by the Fund.
(1) Securities for which over-the-counter market quotations are readily
available are valued at the last reported bid price or at quotations provided by
market makers. Securities for which market quotations are not readily available
are valued at a fair value as determined in good faith by the Trust's Board of
Trustees. Short-term investments are valued at amortized cost (original cost
plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date. Interest
income on investments is accrued daily. Realized gains and losses from security
transactions are determined on the basis of identified cost for both financial
reporting and federal income tax purposes. For financial reporting purposes,
debt discounts are amortized using the yield-to-maturity method.
(3) Income dividends are declared daily by the Fund and paid or reinvested
at net asset value monthly. Other distributions are recorded on the ex-dividend
date and may be reinvested at net asset value. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Distributions payable to
shareholders at September 30, 1994 were $14,739.
(4) No provision for federal income taxes has been made since it is the
Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code.
The Fund's tax year end is December 31. For federal income tax purposes,
at December 31, 1993, the Fund had an accumulated net realized capital loss
carryforward of $29,000, which will expire in 1997.
(5) With respect to U.S. government and U.S. government agency securities in
which the Fund may invest, only U.S. Treasury and Government National Mortgage
Association (GNMA) issues are backed by the full faith and credit of the U.S.
government. All other government issues are backed by the issuing agencies and
their general ability to borrow from the U.S. government.
NOTE B - MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund's management fee is payable monthly to Transamerica Fund Management
Company (TFMC) and is calculated at an annual rate of 0.50 of 1% of the average
daily net assets of the Fund.
TFMC voluntarily agreed to reimburse the Fund for all normal operating
expenses which exceed an annual rate of 1.30% of the Fund's average daily net
assets until March 31, 1995. For the six months ended September 30, 1994, TFMC
reimbursed the Fund $18,924 pursuant to this agreement, of which $8,585 was
receivable at September 30, 1994.
TFMC also provides administrative services to the Fund pursuant to an
administrative service agreement. During the six months ended September 30,
1994, the Fund paid or accrued $14,998 to TFMC for these services.
During the six months ended September 30, 1994, Transamerica Fund
Distributors, Inc. (the "Distributor"), an affiliate of TFMC as principal
underwriter, retained $2,861 as its portion of the commissions charged on sales
of shares of the Fund.
The Fund paid no compensation directly to any officer. Certain officers and
a trustee of the Trust are affiliated with TFMC. In addition, a partner with
Baker & Botts is an officer of the Trust.
7
<PAGE> 118
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
Continued
NOTE C - COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the six months ended September 30, 1994, purchases and sales of
securities, other than short-term obligations, aggregated $5,545,730 and
$5,370,239, respectively.
At September 30, 1994, the identified cost of investments owned is the same
for both financial reporting and federal income tax purposes. At September 30,
1994, the gross unrealized appreciation and gross unrealized depreciation of
investments for federal income tax purposes were $0 and $355,992, respectively.
NOTE D - PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized to finance activities related to the distribution of its shares. The
distribution plan, together with the initial sales charge on shares sold,
complies with the regulations covering maximum sales charges assessed by mutual
funds distributed through securities dealers that are NASD members. The plan
permits the Fund to make payments to the Distributor up to 0.25% annually of
average daily net assets for certain distribution costs such as service fees
paid to dealers, production and distribution of prospectuses to prospective
investors, services provided to new and existing shareholders and other
distribution related activities. During the six months ended September 30, 1994,
no distribution expenses were paid by the Fund.
----------------------------------------------------
NOTE E - SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1994 MARCH 31, 1994
------------------------ -----------------------
SHARES DOLLARS SHARES DOLLARS
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Shares sold ....................................................... 134,291 $1,278,628 1,005,687 $10,251,058
Shares issued in reinvestment of distributions .................... 22,206 209,309 20,007 201,939
Shares redeemed ................................................... (165,055) (1,558,904) (166,042) (1,688,754)
-------- ---------- --------- -----------
Net increase (decrease) in shares outstanding ..................... (8,558) $ (70,967) 859,652 $ 8,764,243
======== ========== ========= ===========
The components of net assets at September 30, 1994, are as follows:
Capital paid-in (unlimited number of shares authorized)............ $10,217,398
Accumulated net realized loss on investments ...................... (620,826)
Net unrealized depreciation of investments ........................ (355,992)
-----------
NET ASSETS ........................................................ $ 9,240,580
===========
</TABLE>
8
